Venture Capital Investing in B2B Software
February 23, 2023
In this episode of Engaging Alternatives Spotlight, Elana Margulies-Snyderman, Director, Publications, EisnerAmper, speaks with Kristen Phillips, Executive Director, Golden Section, a Houston-based studio and venture capital fund with a focus on B2B software.
She shares her outlook for VC investing in B2B software, including the greatest opportunities and challenges, her experience being a woman investment manager in the industry, and how the firm is integrating ESG, DEI and more.
Absolutely. So Kristen, to start off today's conversation, tell us a little about Golden Section and how you got to where you are today.
KP:Sure. It's an interesting story. Golden Section was initially started in the early 2000s as a B2B SaaS software development firm with a focus in also doing some investment on the side. The two founders that started Golden Section were software founders themselves, and so they had a lot of history under their belts in order to for how to build out software, and had taken a lot of those learnings and had some successful exits and then wanted to help other founders achieve the same success that they had. And so, they started Golden section as a way to do that.
Initially we were building out software. We had our technical teams that had built out our previous software that we then conformed or transformed into helping other founders be able to build out theirs. Then we had a adopted a fund list sponsor model. So what we were doing along the way was we were investing in certain companies that we thought had really great trajectory that we felt we could really align with and help them grow as more than just software partners, but as capital partners as well.
And so, we were able to create that fund list sponsor model and then really watched it grow organically and evolved into a fund in 2019, which was our first fund. It would raise around $20-ish million and invested into 12 founders. Then recent years, we have since launched our second fund, which is an $80 million fund, also focused on software founders again, but we're taking a larger approach or a wider approach to the founders that we're investing in. And that's in between fund one and fund two is when the studios join the team.
And so, that's the piece of the business that I was brought on to run and manage. What we do is we take a earlier stage approach to helping founders, kind of like what we were doing in the original parts of Golden section in the sense of taking a founder that just has an idea or has a rough version of product one, and then helping them build their product through our partner software team as well as investing in them along the way, and layering in this component of guide services, which is our way of packaging up all these different service models and deliveries, I guess, to these founders in order to help them avoid mistakes along the way that we've seen. And so, the studios is the piece of the business that I run and is now a part of fund two strategy as well.
EMS:Kristen, congrats on all the success from Golden Section and your journey. Given the focus of B2B software, we'd love to hear your outlook for the space this year.
KP:Our outlook's overall really positive. We're able to make sure that we're aligning ourselves with founders that have experienced a workflow problem firsthand and want to apply software in order to solve that. And so, naturally there's millions of problems out there that people are identifying daily, that through their long experience have the right solution or the right way to solve it. So we're really excited about helping more founders achieve that.
When we look to this upcoming year in 2023, we're hoping to do upwards of really 20 plus investments out of both the studios and fund core investment strategy. And so, we're excited to continue to journey together with founders, and really continue to focus in on those founders that are looking to solve a workflow problem utilizing software.
EMS:Very exciting. More specifically Kristin, what are some of the greatest opportunities you see in B2B SaaS looking ahead, and why?
KP:I think some of the opportunities are just around the quantity of founders out there, and really honing in on our unique point of view and being able to get really specific in the ways in which we help our founders. And so, the more that we've been able to journey together with founders, the more we've been able to learn about founder journey and apply those learnings into new and unique ways of working together with founders.
And so, one of the big strategy that we're continuing forward with that we launched last year is a strategy called Lending or Golden Section Lending. It's a revenue-based financing opportunity for founders within our portfolio, but we're also looking outside of our portfolio as well in order to be able to provide non-dilutive financing to founders that traditionally would have to go and get equity dollars for. But what we're able to do is provide debt based on the revenue attraction. And so, I think those are some of the fun opportunities that we're chasing down in the sense of really looking at the holistic landscape externally and internally, and seeing where can we better press in order to better support founders in non-traditional ways.
EMS:Kristen, on the other hand, what are some of the greatest challenges you're up against and why?
KP:I laugh because working with founders there's always a million challenges, but they are challenges that we've signed up for and that we're excited to be able to solve with them.
I think one of our biggest opportunistic challenges is making sure that we're able to really help our founders see our unique point of view. Luckily though, our unique point of view is trending with how the market's trending right now, which is really focused around capital efficiency. And so, what we're helping to help our founders do is really take a hard look at all the different priorities that they're working on and then being able to help them focus in on the key things that we believe matter.
We've built this thing called the SaaS Return on Capital flywheel, which really just tracks how money moves through a company and all the different use cases for it. But when you stop and really look at what a founder should be focusing on, the main thing that we think a founder should be focusing on is driving revenue. Oftentimes, it's the founder, the person that built the company that understands that component, understands the customers' pain point, the best out of anyone. And so, they're typically the most effective at driving revenue.
And so, if we're able to as their partner come alongside them and say, "Hey, let's turn around and face the dragon. Let's really look at all the different things that you're working on. Let's make sure that we're optimizing this sales and marketing component to drive revenue," and then watching the distribution of capital throughout the entire business and making sure that we have the right ratios along the way in order to best optimize and make sure that capital that's coming in is growing that flywheel and spinning that flywheel more so than stalling it. And if you can achieve true capital efficiency through a strong sales efficiency ratio, then you're having to take in less investor capital along the way, which again furthers that capital efficient flywheel and helps us as their capital partners really be able to make some really effective tweaks that then have a meaningful impact on that company.
EMS:Kristen, to shift gears a little bit, wanted to discuss you being a woman investment manager in the industry. Love to hear your thoughts.
KP:It's been so much fun. I don't know if there's really an emphasis or there hasn't been an emphasis on me being a woman in this industry. Candidly, it's an industry that I found I kind of stumbled into. I've always had a passion for startups. I've always wanted to be a founder myself. I've always found that I've been a builder by nature. Whenever I graduated, I was looking at opportunities in order to do that from a holistic standpoint. So that got me into this kind of startup ecosystem kind of world and building programs and building networks and connecting entrepreneurs to investors or strategic partners, or being that connection piece.
When I was looking for my next adventure, I was friends with the Golden Section folks, and it ended up just being a really, really good fit for everything that I had seen in my career and the ways in which I've kind of honed my craft, if you will, has been jumping into any kind of problem and pushing forward in the ambiguity.
And so, in my career, I've built programs from scratch. I've built networks from the ground up. I've helped founders get connected to the right people. And so, whenever I was looking for my next adventure, and I had become friends with some of the people at Golden Section, it was a natural fit in the sense that they were looking for somebody that could come in and take this model that is now the studios, which was initially just a, "We'll invest some, we'll build their business from a software perspective, and we'll give them some strategic mentorship." So that was the framework that I had to go off of. And so whenever I was presented with that fun problem to solve, I got really excited about being able to build something that's intentionally different, that looks and feels different than an accelerator out there or an incubator out there, or even some venture studios out there or, and is definitely different than the traditional BC model.
And so, having that fun problem to solve, I was able to, or I wanted to jump into the team and help them do that. I think the biggest pieces of advice and feedback that I've found to be helpful throughout my career has been "lean in," which is hard, "be up for the challenge" and "get to know yourself really well." Understand what your strengths and weaknesses are. Understand, more so than that, is what are you uniquely made and gifted in order to do. Then, figure out a way to pursue it fully. And so, I think that plus dealing with the ambiguity of the startup world is all feedback that I've gotten that's been really helpful and in helping me get to this point in my career.
EMS:I love sharing your journey, Kristen. As a follow up to that, obviously ESG, DEI are top of mind, so it'd be remiss if we failed to discuss this at least briefly. Your thoughts on what Golden Section's doing to integrate these into the firm's culture.
KP:Sure. The beauty of being a VC and a global company at that, we have offices all around the world. And so, by having a really wide reach and investing in founders and companies, we're able to have a much bigger impact than just even our company as it stands internally. And so, we're a company of 120 plus people globally, but I think one of the really fun components of what we're doing too is that we're able to invest in founders that are able to grow companies as really this like ripple and magnifier effect. And so, we highly value diversity and different backgrounds in ways of going about and solving problems. We're excited to be able to invest in our founders that are going to have a much bigger impact than what we could ever have as they continue to grow their companies as well.
EMS:Kristen, we covered a lot of ground today. Wanted to see if you had any final thoughts you'd like to share with us.
KP:Sure. I think one final thought is just embedded within our unique point of view that I think is really unique to Golden Section and fun to talk about is when we look at investing in our companies, we're really focused around having or helping them achieve a meaningful exit. It's something that we talk about within the probably first meeting with our founders, with potential founders, and our due diligence process is talking about what does that look like for them, what are they looking to achieve. Because as their capital partners, we want to be really aligned in order to help them achieve that.
And so, from our point of view, we want to help our companies achieve a meaningful exit in as little as three to five years. And so, what that requires in order to set that up for success and in order for that to be able to happen is that it helps or it requires that our founders raise as little capital as they can in order to grow, of course, but really maintain as much equity as they possibly can. It also requires them to be really strategic with the ways in which they're building their companies as well, so that they're not just trying to low-code no-code a solution in order to get something out and rebuild each every year, but rather building right from the start. It also requires them to get really strategic about their revenue too. Really focus on growing that as much as they possibly can. Because we've found that the perfect window for a founder to or for a company to exit is within a they're achieving about a $5 million to $15 million in annual reoccurring revenue.
And so, once they're at that point then looking at a 5X exit multiple or a 6X exit multiple which is what we're kind of seeing right now, that becomes a really meaningful impact for a founder that's retained 50 plus percent of their company.
And so, I think it's a bit of a different strategy than you'll see from most out there, but we think it's really unique to the heart and soul behind what we're trying to do, is really helping our founders create a business that's going to have a meaningful impact while also instilling and remaining and having a balanced life. I think that's a big thing for us, too. We all have families here and we all want to make sure that our founders are able to have families as well. And so, it's really doing things in a balanced and measured way in order to have it as big of an impact as they possibly can. And so, that's something that we're really excited to get around and behind with every company that we invest in.
EMS:Well, Kristen, I'd like to thank you so much for sharing your perspective with us. And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.
Transcribed by Rev.com