Emerging technology and high-growth, expansion-stage startups play an important role in creating value in the digital transformation to an intelligent enterprise. That was a key takeaway from the discussions at Transform!2019, an event hosted by the enterprise application leader SAP last month, for an audience of startup executives, enterprise IT leaders and other industry experts to explore how enterprises are managing their digital transformation.

With the recent expansion of Sapphire Ventures’ Portfolio Growth business development team in Europe and our access Silicon Valley innovation, Sapphire Ventures was asked to participate in Transform!2019 and bring some of our portfolio companies into the conversation to help IT executives better understand the startup ecosystem.  Executives from Sapphire portfolio companies JFrog, Contentful and Thoughtspot helped spark these two themes that developed throughout the event:

The Explosive Growth of Data Continues

The 21st century has been called the Information Age, and compared to other global resources, we won’t be running out of information any time soon.  According to Christian Werling of ThoughtSpot, various experts estimate the size of the digital universe will double every 18 months, a 50-fold growth from 2010 to 2020. Human- and machine or IoT data is experiencing an 10x faster growth rate than traditional business data, and IoT generated data is increasing even more rapidly.

It’s no surprise that with this growth, modern enterprises can easily be overwhelmed by the sheer volume of data, making the ability to store, process, analyze, interpret, consume, and act a primary issue to future enterprise vale. The pivotal question in the analytics and business intelligence space remains: how to transform raw data into actionable insight?

Christian Werling, Regional Director DACH at ThoughtSpot, a business intelligence and big data analytics company, posed a thought-provoking question for the group:  “Why not integrate a next-generation analytics platform with your back-end, systems of records so that business people can use Google-like search to easily analyze complex, large-scale enterprise data and get trusted insights to questions they didn’t know to ask?”

Relational search and augmented analytics are two such new approaches designed for searching and analyzing company data – whether that be financial, marketing, sales, supply chain, and other business data sources. That’s because for most global enterprises, data usually exists in multiple silos and systems distributed around the world.  A relational search engine needs to crawl all these data sources, correctly identify the relationships, and enable everyone in the business to search and analyze the data relevant to them. But to be successful at the employee level, all this must be done without losing the instant gratification people have come to expect from a consumer search engine, like Google.

Similarly, a true augmented analytics system helps business users to ask questions they never thought to ask because of the complexity of getting to the answer.  Practically, that means augmented analytics requires: no advance knowledge about the underlying data is needed, nor lengthy transactions to click. Thanks to sophisticated algorithms and a scalable architecture these augmented systems are helping enterprises find rare “golden nuggets” of information across an otherwise impossible ocean of data.

The Impact of DevOps and Continuous Innovation on Digital Transformation

DevOps is not necessarily a category you would immediately associate with enterprise digital transformation, but its focus on continuous planning, development, release of software is significantly impacting companies.

Transform!2019 featured a panel on DevOps and Digital Transformation hosted by Yair Re’em consisting of Ido Green, Partha Seetala, Vasu Chandrasekhara, Volker Kirchgeorg, and Trung Nguyen who talked about DevOps best practices and the past, the present and future of DevOps.

When it comes to creating a business that can thrive in the digital age, the benefits of DevOps are clear: faster deployment frequency and lower failure rates are proven advantages. Monthly, weekly and sometimes even daily release cycles in the Cloud, bring more velocity to software organization, enabling more value, faster to your users.

A good part of the discussion was on the adoption trends for DevOps, challenges it can create in the transformative journey, and best practices for implementing DevOps.

One of the central issues Ido Green from JFrog, a developer-centric software distribution platform provider, addressed was about security and how it can be an impediment for DevOps adoption. What should be the trade-off in DevOps Solutions between velocity and security?

Ido believes that there should be no trade off sacrificing velocity. He believes enterprises need to bake security into your DevOps in a helpful, not hindering, way for developers. Companies can achieve this by using tools that implements guardrails, not gates which keeps developers on a paved road without having to spend time working through toll gates.

Ido provided the audience with these additional tips on DevOps tools:  

1. Velocity: use an automated tool that suggests solutions and not just ‘FYI’ information. Moreover, the tool should secure the pipeline from the development phase all the way to deployment, and later, monitoring everything that is in production.  Look for tools that minimize false-positive alerts, so your developers gain trust in the tool.
2. Security: your tools should have a wide coverage of vulnerabilities (think beyond NVD – National Vulnerability Database). They should have a way to integrate with IDEs (Integrated Development Environment) so your developers are aware of risks while building the software.  Last but not least, your developers need a tool that not only tells you what is wrong but also provides a clear path to remediation (i.e. precise matching between vulnerabilities and packages and offer the ones that are fixed).

The group agreed that there is likely no single solution that answers all of a company’s needs.  Each company will have different priorities and gaps that need to be addressed as they focus on: Innovation, security and cost reduction.

Here is what the group recommended looking at for each of these priorities:

• Innovation: It’s a critical success factor for any company that wishes to boost progress and keep improving its product. The speed that you gain from DevOps best practices helps you increase the possibilities to build more innovative services.
• Security: it is important to be able to find vulnerabilities as soon as possible in the development cycle and later mitigate them as fast as you can. A great DevSecOps ability is therefore critical.
• Cost: DevOps helps reduce costs (finding bugs as early as possible and/or removing vulnerabilities from production). It is also a leverage point to your internal development team as they can reach users faster/better/cheaper.

The Future of the Intelligent Enterprise

All industries have a lot to think about on their path to becoming an intelligent enterprise.  Emerging technologies, whether in the form of a new solutions like augmented analytics, or a fundamental rethinking of their software development process through DevOps, can play an important role in their continued growth.  Sapphire Ventures looks forward to helping IT leaders navigate the shifting landscape through events like Transform!2019 or our online SV Explorer platform to keep CIOs connected with new technologies and vendors.

Many thanks to Ido Green (JFrog) and Christian Werling (ThoughtSpot) for contributing to this article, and the conversation at Transform!2019.

Since it was started in 2014, Sapphire’s Portfolio Growth arm has generated thousands of introductions between startups and enterprise customers. Perhaps, the most rewarding outcomes of these connections is new revenue or logo acquisitions for our portfolio companies.  We feel an equally valuable takeaway for us, however, is the insights this has given us into the ingredients for truly successful pitches to CIOs.

Many factors shape a successful first pitch to a CIO and securing that follow-on meeting.  Many stars have to align, many boxes must be checked, and the technology must actually solve a business need.  But there are certain mistakes we see startups repeatedly make early in their first exposure to C-level technology buyers, that we feel hamper their chances of any ongoing engagement.   

Below are three recurring mistakes — and our advice on how to steer clear of them:

1.  Asking zero questions  

Getting face-to-face with a Global 2000 CXO is a truly rare opportunity to not only market your company – but also to understand how they think.

Having personally attended hundreds of CIO pitches by startups, I’m amazed time and again that even the most seasoned startup CEOs don’t ask the CIO a single question during their meetings.  Instead, they launch immediately into a description of what they do and how they’re different from all the other vendors. This is truly a missed opportunity on multiple levels.

Asking questions early on in a pitch gives you several advantages:

• It reveals the customer’s inclinations (or biases) around your specific technology so you know what you’re dealing with.  
• It gives you context on their IT stack so you can highlight those aspects of your solution that most address their unique landscape.  
• And ultimately, it engages the CXO in a dialogue that positions you as a thought partner and not merely as someone delivering a sales pitch.   

In our experience, the average pitch CXO is 30-40 minutes.  We think that at least 5 minutes in any such meeting should be dedicated to the startup asking the customer questions like:   

• How familiar are you with [XYZ technology domain – CASB, Blockchain, DevOps, ML platforms etc]? If the CIO is already familiar, cut the “101” opening credits and focus on what differentiates you.  Nothing annoys IT execs more than being lectured on “disruptive” technology they already know.
• Can you tell me about your IT landscape or stack? If you’re providing cloud management tools for example, get a quick grasp on their current and planned cloud footprint.  If nothing else, find out if they’re using or have talked to your competitors!
• What have been your biggest challenges in [given domain]? Open-ended queries can help tease out what is most pressing to the CIO –  cost reduction, security, upgrading their architecture and beyond?
• What benefits would you derive if you had [the end state that your solution produces]? Prompt the CIO to imagine a world where your solution is implemented to quickly give you a sense where (if at all) the potential business value of your startup might lie.

The idea of consultative solution selling is now decades-old and giving way to newer avatars,  such as the idea of “Insight Selling”. Whatever the reigning wisdom, the timeless principle of engaging your target in a conversation (vs. a monologue) still holds very true for CIO-to-startup discussions.

2. Shy away from discussing obstacles to success

When startups proudly present their glossy “NASCAR” slides – impressive logos of global corporations that have bought and implemented their technology – they have the CIO’s attention for a few seconds.

They can hold that attention for a LOT longer if they are also realistic and talk about the most common challenges customers have encountered in implementing  the solution and how they overcame them. The challenges you bring up can include cultural change, dealing with legacy architecture, messy integrations or the pains of replacing an existing solution.  By talking openly about customer challenges you build credibility and persuade the CIO that you truly understand the obstacles to working at enterprise scale – and that you are equipped to partner with them for a potentially difficult but rewarding journey.

At the growth stage that we invest in, startup CEOs have solid experience with Global 2000 companies deploying their technology, and can share that knowledge and secrets to success employed by others with the CIO.  Often this type of discussion adds immediate and real value to the interaction with the CIO.

This situation is not dissimilar from startups making funding pitches to VCs for funding:   showing growth charts that always and inevitably trend “up and to the right”. Just as those funding pitches are often less convincing for seasoned VCs, CIOs appreciate pitches grounded in the reality of expected implementation or adoption bumps and how you’ll deal with them, as you paint the picture of longer-term success. 

3. Forget that CIOs are business executives and portfolio managers

It is important to remember that most CIOs aren’t geeks – they’re actually P&L managers and chief executives of their own IT organizations.   CIOs routinely tell Sapphire Ventures that reducing cost of IT delivery, increasing IT efficiencies and consolidating their vendor landscapes are among their top priorities. This literally translates into spending less dollars on IT and working with FEWER vendors.  Meanwhile, startups are pitching them on adding yet another vendor and MORE expense to the mix – often the opposite of the CIOs “lean” imperatives.

So, no matter how compelling your technology is – most IT executives are thinking during your pitch: “How am I going to pay for this?” or “If I implement this technology, can I displace another vendor’s technology (and another expense item on my P&L)?”  This thinking is especially true of categories that are densely populated with startups and vendors – such as cybersecurity or marketing tech – where there are likely already a lot of in-house solutions implemented at the customer.  

When you’re pitching, make sure to clarify if you’ll enable the client to replace a substitute solution.  If the CIO can work with one less vendor, and keep the costs stable with just a more innovation solution – that is a winning proposition.  If you’re NOT allowing short-term replacement, will you be able to avoid future spending on additional solutions? Helping improve cost structures within an existing expense category makes it a lot easier for a CIO to justify new spending in many cases.   That said – if you’re creating a whole new category of technology, or unlocking new business value – there can often be budget in the CIO’s portfolio for greenfield, emerging technologies.  If you do go after the “greenfield” budget with new category creation, leading with a message of “disruptive” innovation vs. incremental (or “sustaining” innovation) is often the more effective path.   

Finally, a typical CIO will have a series of direct reports who are making these kinds of portfolio decisions at a modular level.  Work to identify these other decision-makers within the CIO’s organization and then understand their trade-offs is also a sophisticated way of paving your way into that customer’s portfolio. 

Set yourself up for success

Landing meetings with CIOs is hard, and will continue to be that way – especially with the burgeoning crop of new IT startups being funded.  When you finally get that meeting, maximize your chances of success in translating CXO meetings into opportunities by shifting the orientation of your pitches to gather more insights from the customer, authentically engage in a discussion about obstacles to success, and place your solution in the context of the business leadership role the CIO plays in a large enterprise.   Do anything else, and you risk wasting the CIO’s time — and your’s.

Just a month ago I wrote about why we are Embracing the Cloud here at Sapphire Ventures.  The basic thesis is that cloud adoption has inflected and as a result, SaaS stocks are likely to outperform the market for years to come due to the growth tailwinds.  So far this thesis is playing out in 2019, with SaaS stocks up almost 30% year-to-date, just two and a half months into the year(i).

But I received some feedback on the blog along the lines of: “Yeah, SaaS stocks may be up, but what about new company creation?  And what about exit alternatives for software entrepreneurs, given that the tech IPO market appears to be stuck in the mud, with fewer than 10 software IPOs on average annually over the past 10 years?(ii)”  Put another way, “can’t we just go back to the good old days with a lower IPO bar and more truly emerging-growth IPOs?”

Here at Sapphire Ventures we don’t see it that way; we like the capital markets set up for software entrepreneurs in the “here and now” of 2019.  We believe the glass is way more than half full. Let’s go through the good news – and there’s plenty of it. Here’s a graph of tech and software IPOs over the past decade since the financial crisis of 2008:

IPO activity is on the rise, with more than 30 tech IPOs in 2018.  More importantly from a software perspective, 2018 saw nearly five new software IPOs each quarter.  With software IPOs now comprising ~60% of all tech IPOs, we see that as a bullish sign for software investment.  In the decade prior, software IPOs averaged just 46% of all tech IPOs(ii).

Yes, the IPO bar is higher, with the average LTM revenues for the 32 tech IPOs in the class of 2018 coming in at $284M and median LTM revenues at $192M. This squares with what I’m hearing bankers routinely say for software companies these days that the minimum IPO bar is $100M in the rear-view mirror and approaching $200M in the calendar year of the IPO(ii).

But funding for late-stage tech innovation is on the rise.  The IPO is just one step on a company’s capital markets journey.  Take a look at the following chart:

VC-backed tech IPO activity may have stagnated, but this belies the underlying story that mega-round funding for technology companies is on a steady rise.  In today’s world, we define mega-rounds as IPOs combined with $100M+ late-stage private equity rounds (the up-and-to-the-right gray line in the chart above). Back in the so-called good old days, typical tech IPO deal size was $100M or less. At current levels, this would equate to 10 such financings every month between the public and private markets. I believe today’s private markets are far more entrepreneur-friendly in accepting founder liquidity as part and parcel of the round than yesterday’s IPO markets ever were(iii).

I feel another strong indicator of health in today’s markets is the amount of capital raised prior to IPO.  The typical tech company raises more than $200M prior to going public today (in fact, $239M at the median in the IPO class of 2018), versus just $64M at the median in 2012.  To me, this means that funding for tech innovation is plentiful – and better yet, when companies do go public, they are on steadier footing with a stronger balance sheet, higher revenue levels and more mature systems to ensure they can weather the storm of quarterly earnings reports(ii).

Back in the so-called good old days, we used to talk about the “valley of death” where newly public tech companies went to die as they tried to march through $500M market cap and come out the other side at $2B.  This death valley existed because software companies that hadn’t proven they could scale went public too soon at $500M market caps. Many of these companies had false “exits” – the company didn’t scale, missed growth estimates, and entrepreneurs and VCs alike didn’t achieve the liquidity they were looking for.  In the 2010 class of tech IPOs, the median market cap at IPO was $535M, and the median market cap for these same 17 companies two years later (on the last trading day of January 2013) was just $390M. (And by the way, the markets weren’t too shabby overall in 2011 and 2012.) Contrast that to the tech IPO class of 2016.  19 tech companies went public in 2016 at a median market cap of $718M and traded up to $1.2B two years later (at the end of January 2019). The average statistics are even more compelling: IPO market cap of $1.0B, trading to $2.4B on average as of January 2019. The higher IPO bar has all but eliminated the valley of death(ii).

And here’s some more good news for software entrepreneurs.  The number of $2B+ market cap software companies (just the public ones, not even counting private unicorns) is up from just 15 in 2000 to 76 today.  Plus, as the chart below shows, software companies are becoming that much more important to the tech ecosystem, making up ~20% of all tech companies with $2B+ market caps back in 2000 (and even as recently as 2010), but close to 40% of all $2B+ tech companies today(ii).

With 76 $2B+ public software companies and more than 200 total $2B+ tech companies, there are plenty of companies with the scale and the firepower to acquire today’s VC-backed software companies.  Not only that but let’s take a quick look at the trading multiples. Back in 2010, the 19 $2B+ public software companies traded at median multiples on next year’s statistics of 5.5x revenues, 17.5x EBITDA and 28.7x price/earnings ratio.  Today, the 76 $2B+ public software companies trade roughly 30-40% higher at 7.0x NTM revenues, 25.4x EBITDA and 39.3x P/E(ii).

With so many potential acquirors trading at attractive multiples, it’s not surprising that the number of $500M+ software M&A exits annually has nearly doubled from 21 back in 2010 to 38 in 2018.  And remember, the average IPO back in the so-called “good old days” used to clock in at around $500M as well – yet there were only 5 of those annually in the 2010 timeframe(ii).

With IPOs no longer stuck in the mud, with mega-round fundings skyrocketing and with the number of solid M&A outcomes nearly doubling year-over-year, I think it is safe to say that these are the good old days for software entrepreneurs.

Thanks to Sapphire Ventures Associate Jane Lee for pulling all this great data for me.

In recent decades, many venture capital firms are working to differentiate themselves beyond their ability to write a check. They understand that entrepreneurs’ success isn’t strictly correlated to the size of a funding round; rather, start-ups often need the intelligence, mentorship, and network an experienced VC is able to provide in addition to cash.

Today, value-add teams at VC firms exist in many flavors. Some specialize in engineering support, others center on customer success; still more offer geographical expertise. Sapphire Ventures created its own Portfolio Growth team, which works closely with our entrepreneurs and GPs to help solve their business development, talent, and marketing challenges.

If you’re an entrepreneur with options during fundraising, it can be a challenge to determine which firm is right for you. Any investor can provide financing — and that coveted pattern recognition and broad understanding of your industry matter — but how do you make sure you find a VC with the right operational team to help unlock your company’s real potential? Below are 7 questions every founder should ask about a prospective VC’s value add team to ensure she or he finds the best match.

1. How senior is the team?

Some firms stack their growth teams with junior colleagues and inflated titles. It’s great experience for pre- or post-MBA associates to sit on your board and gain exposure to the start-up process — but this isn’t usually in your best interest. Make sure the value-add team you work with is staffed with senior team members with track records of success.

One particular benefit to working with senior growth partners is access to their Rolodex. When you’re in the middle of rapid growth, the ability to quickly expand your network can be invaluable. For example, if you need to boost sales in a given quarter, you should feel comfortable asking them to introduce you to decision makers at your target accounts. Or, when you’re ready to hire a CXO to augment your team, this is where you should be able to lean on members of your growth team for reputable connections.

Above all, your partners should be experienced startup operators themselves and know what it’s like day to day in the trenches. Otherwise, you’ll be taking advice from people who don’t truly understand the types of problems you’re working through — and who can’t offer the best direction.

2. What is the relationship between the investment team and value-add team?

You want your portfolio growth team to have a direct line of access — and excellent working relationship — with their investment team. Do the two groups show up together to meetings? If they do, are they on the same page, or do they have different agendas? Before the investment closes, does the investment team make an effort to connect you with the growth team for their ideas and advice?

The dynamic between these teams will have a strong impact on your progress. If they’re not aligned, it’s likely you’ll receive mixed messages—which will only make it more confusing and cumbersome to move forward. When speed is imperative, poor teamwork could derail you.

3. What is the structure of the team?

Within the growth team itself, look carefully for cohesion and synergy. Are they simply a bunch of individuals pitching in where they see fit, or do they have set roles and responsibilities that play to their backgrounds and specific strengths? Are they situated under a cohesive leadership structure within the firm and focused on portfolio success, or are they reporting into different investment partners, who may have different agendas, and reduced synergies?

Do the team members complement each other? High-performing teams, even small ones, have a healthy balance of technical and social capabilities—which should play into the range of skills needed to build your company. In addition, understanding your team’s own strengths and weaknesses will help you better select a partner that complements you.

4. How – exactly – will they add value?

You want to be sure that your VC’s growth team takes your company seriously. Indications of their dedication include:

• Delivering specific ideas to you pre-investment
• Symmetry between what you’re looking for and what they offer (e.g., if they pitch their strength in helping with expansion into Asia, but your market is firmly domestic, that’s clearly a mismatch)
• Their availability to meet when you need them — and their ability to follow through on a timely basis

Sapphire’s Portfolio Growth team, for example, is able to provide consistent, extraordinary support to growth stage startups that cater largely to enterprises. We have a global network and deep industry expertise that helps corporate and IT executives keep pace with new trends and find tools that fit their unique needs.

With regards to talent, Sapphire goes well beyond the job board. We’re able to find executives that come in and move the needle. Finally, our team’s European network can help founders looking to access the next frontier in tech.

5. Do they have carried interest?

VCs with carried interest receive a share of the firm’s profits. They are retained by the firm for a longer period of time and have a direct stake in the success of your start-up. If your value-add team partners have carried interest, it is an indicator that will be committed — over and above other members of the firm — to navigating many of the more frustrating aspects of growing a company.

Carried interest can also help you avoid a revolving door of people coming and going from your case. Because the benefit of carried interest is usually reserved for senior partners, it can whittle down your list of potential collaborators to those who are already proven in the start-up ecosystem — eliminating those who are less experienced. We realize it is a sensitive question, but it’s important for you to know they are in it for the long-haul with you.

6. How is their success measured?

Ask your prospective growth team what OKRs/KPIs they rely on — then cross-reference them with your own to ensure they match your success.

At Sapphire, one of our KPIs is 90% referencability from our CEOs. Your success is our success — full stop. If our CEO wouldn’t recommend Sapphire to another entrepreneur, we haven’t been successful.

It’s important to be wary of vanity/effort KPIs, such as the number of introductions made in given month or attendees at meetings — these are not outcome oriented and can confuse activity with effectiveness.

In the end, be sure the investment team and value-add professionals share KPIs. Again, you want to be sure these teams are as aligned as possible to amplify your success.

7. What do references say?

Metrics are essential; however, selecting a value-add team is ultimately personal. When you’re in the midst of rapid expansion, it’s easy to veer off course if you don’t have a solid foundation with your colleagues. Being able to align on values, set expectations, and delegate work streams are the bedrock of hitting any benchmark as a group.

To this end, do your research to determine what CEOs say about a VC’s growth team. Do they — and you — personally know of value-add team members? Do you know them by name? Can you call them? On speed dial? This is the level of access and reputation you should demand if you’re serious about scaling.

Start Your Due Diligence Early

Smart founders know that selecting venture partners begins long before a fundraising deadline. A main reason for this is to be able to test and vet a firm’s value-add capabilities.

CEOs should plan to have a “portfolio” approach to these platforms. As your company ages, your needs will invariably change. At the early phase you may need help with core engineering, UX, or even SDR support. As your business matures, you may find that you need help with other areas, e.g. channel entry, pricing and packaging, or perhaps hiring your COO.

Get to know VCs months or even years in advance of taking their capital. Get a feel for and leverage their platform to be sure it fits your specific needs and phase of growth. As the proverb says, it takes a village! (To raise a child or a successful business.)

Once you’ve done your homework, narrowed your list, and are happy with the valuation and ownership — don’t wait. Solidify the partnership and move forward.

To learn more about how Sapphire Ventures approaches value-add services, visit our Portfolio Growth team page.