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I’m a successful investor — 17 of my startups went public and 20 were acquired. Here are the 5 most important qualities I look for before investing in any company.


I'm a successful investor — 17 of my startups went public and 20 were acquired. Here are the 5 most important qualities I look for before investing in any company.
  • Navin Chaddha is the managing director of the Mayfield Fund and a serial entrepreneur.
  • He says that during this challenging time, it’s important for investors to make careful decisions about the companies and entrepreneurs they choose to partner with.
  • When you’re considering a business partnership, look for a company that offers a critical product or service, rather than something that is nonessential.
  • If an entrepreneur is seeking out your investment, make sure that they’re developing an innovative business model and are eager to expand their company digitally.
  • Click here for more BI Prime stories.

I am saddened and outraged by patterns of persistent racial injustice against black Americans, and stand in solidarity with the black community. While it feels hard to be optimistic right now, as investors with a long view, we are eternal believers in the power of the entrepreneur and their ability to lead us to climb new hills.

As an investor who has partnered with over 50 entrepreneurs over the last fifteen years, including through prior downturns, I firmly believe that great companies can be created in tough times. Further, as an early-stage investor, I most often partner with entrepreneurs at the ideation stage and expect to guide them to build iconic companies over the next decade. So I look for fundamental characteristics of teams, which can endure through internal pivots or external market changes.  

Here are the five considerations I am using to evaluate whether I want to partner with entrepreneurs today.

1. Sell painkillers, not vitamins

This has always been a driver for me, and has only become more critical in our current climate. While entrepreneurs always believe that their company mission will change the world, they need to listen carefully to early customer feedback, and evaluate whether their value proposition is being perceived as a must-have versus a nice-to-have. If the latter, they should dig deeper to see if they can refine their offering to move further up in the urgency-to-adopt stack, as it will save them capital and cycles when they bring it to market.

A good current example is that of publicly-held infrastructure and application monitoring company DataDog, which has benefited from enterprises moving to the cloud, a trend that has only accelerated as companies support remote work. As the leading monitoring service for cloud-scale infrastructure and applications, it is currently trading at a valuation of over $20 billion and just filed to raise senior notes for additional capital. An example of one of our infrastructure software investments which is benefiting from this trend is privately-held Hashicorp, the leader in multi-cloud automation, which raised a round of financing valuing the company at over $5 billion, just as shelter-in-place went into effect.

We partnered with Mitch and Armon, the cofounders of Hashicorp, by leading their Series A round in 2014. Their products had caught fire in the open source community and they decided to build a company around it and hired world-class operator Dave McJannet as CEO. Right from the founding, however, they knew that the world would adopt multiple clouds and saw the need for an automation platform to provision, secure, connect, and run any application on any infrastructure.

2. Innovate across the value chain

Startups often build disruptive products, but overlook that innovation in business models can provide a competitive advantage as well. This is especially obvious in consumer-facing companies which leverage the marketplace model of connecting buyers and sellers. Even in an Amazon-dominated world, publicly-held Etsy was able to carve out its unique position as a marketplace that connected craftspeople to consumers interested in buying handmade, vintage, and bespoke products. As homebound people began shopping and small businesses went online, Etsy had a record month in April with sales of face masks, but also of home furnishings, toys, games, and gardening products. The company has a current market capitalization of almost $10 billion, and the outlook looks bright going forward.

An example of one of our consumer investments that is benefiting from an innovative business model is Poshmark, the leading social commerce marketplace for fashion. Their focus on re-commerce, their inventory-less model, the loyalty of their 8 million seller stylists who make significant income on the platform and buyers (who no longer have access to TJ Maxx or Ross Dress for Less) looking for deals, have propelled the growth of the business.

We partnered with Manish Chandra, CEO, and the founding team by leading their Series A in 2011, at which time they knew that leveraging the rise of social platforms and the advent of the iPhone and Instagram would deliver a delightful user experience and the promise to build the first dedicated online peer-to-peer fashion marketplace.

3. Build your digital native superpowers 

With remote work as our de facto mode and the absence of opportunities to *press palms*, the need for digital engagement with customers and prospects only increases in importance. An entrepreneur who understands the nuances of the digital world and builds that as a fundamental ingredient of their business plan will definitely have a leg up over other similar companies.

A good example of a company that built digital into their DNA is publicly-held Hubspot, the leading marketing, sales and customer service SaaS platform. As this just-released benchmark survey of their 70,000 customers illustrates, there has been a post-Covid surge in sales and marketing emails as well as Web site traffic. As the go-to solution for inbound marketing, sales, and service, Hubspot has thrived during these tough times, enjoying robust revenue growth and a significant uptick in their valuation which is currently at $8.4 billion.

One of our companies, Outreach, the market-leading sales engagement platform, similarly delivers a digital-native advantage to sales professionals. The company commissioned a recent Forrester study which illustrates an ROI of 387% over three years and a payback period of less than three months since initial investment. Over 4,000 customers such as Adobe, Tableau, DoorDash, Splunk, DocuSign, and SAP depend on Outreach to deliver dramatic increases in sales productivity and smarter, more insightful engagement with customers.One of Outreach’s customers, Amazon Web Services, recently spoke about how excited they were to be working with Outreach because it helps them deliver high effectiveness and efficiency through this time of unprecedented change.

We partnered with CEO Manny Medina in 2015, and he knew then that to deliver rapid results, companies needed to fundamentally change the way their sales teams interacted with customers — they needed a robust AI-powered “system of action” like Outreach to drive efficiency and visibility across their organizations.  

4. Prioritize capital efficiency as a core value

I have always been a fan of entrepreneurs who focus on key priorities to extend the runway of the capital they raise (one of my core beliefs is that start-ups die of indigestion, not starvation). With the current climate where large rounds and growth capital is scarce, this is an even more critical consideration.

A good example of this is Atlassian, development and collaboration leader, which was bootstrapped with $100,000 in credit card debt from the founders and got to profitability before raising its first venture round in 2010. An example from our portfolio is Rancher, the leader in Kubernetes management, whose revenues exceed the amount of capital they have spent since inception. 

5. Remember that people make products, products don’t make people

This is a core belief of Mayfield, and the resulting motto of people first is one which guides us everyday. When you invest at the idea stage of a company, the first consideration is always about the founding team. We realize that company building takes time so we bet on the jockey, rather than the race track. Some questions going through our minds include: What drove this founder to pursue this specific idea? What motivates them to take on the struggle of being an entrepreneur? Who are their mentors and inspirations? Will they stay for the long journey or sell out early if they have initial success? Will they be a compassionate leader? Do they have a growth mindset to navigate uncertainty? So if you can be open and candid in your interactions with investors, it will help you get into a mutual zone of trust sooner.  

The best investors combine radical candor with being loyal to a fault when interacting with entrepreneurs. So when you have a painkiller idea, a business model or product innovation, a digital native DNA, and a capital efficient plan, remember to seek out and partner with someone who invests in relationships, not transactions.

Navin Chaddha is the managing director at Mayfield Fund where he has raised over $2.2 billion in new capital. He has also been named a Young Global Leader by the World Economic Forum.

Source: https://www.businessinsider.com/5-most-important-things-investors-look-for-company-startup-2020-6

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