Enterprise software startups are changing how they infiltrate companies, and investors are taking note.
Last week, I chatted with Lerer Hippeau‘s Ben Lerer after his firm had just led a seed round in Air, a digital asset management platform. I used the opportunity to pick his brain about what he’s searching for in early-stage investments and which trends he believes are shaking up enterprise software.
Below is a chunk of our conversation, which has been edited for length and clarity.
TechCrunch: What kinds of things are you looking at recently? Anything notable?
Ben Lerer: The market is always shifting, but 40,000 feet up, nothing has changed in that we’re always just focused on investing in people. But, beyond people, there’s certainly been various areas of opportunity that over the years we have had different kinds of focus on. One that I’ve been most focused on traditionally has been a category that would’ve been called direct-to-consumer brands. Now you would probably just call it “future of consumer” or “future of retail.” Now, I think direct-to-consumer is not the entire pie but just a piece of the pie. So generally my focus is doing consumer deals and then sometimes I focus on deals that are not necessarily consumer, but they’re SaaS businesses, often SaaS businesses that my consumer companies are current or potential customers of.
What do you think of DTC right now? I’ve been hearing different things about whether it has peaked and whether there’s been a pretty clear over-investment in these companies.
Look, there have been so many sort of pendulum swings or corrections over the last few years in one way or another. I think there are a lot of really great, very real businesses that have been built that already are, or are going to be, worth lots and lots of money and will be generationally important brands.
And maybe because of a sort of a healthy amount of venture capital around, a lot of mediocre fakers have been able to sort of look like maybe they’re on the trajectory of building something really spectacular and lasting but have not been able to deliver on that, and I actually think there’s lots of confusion right now as to which are which.
What do you look for when you’re making an early investment, anything that might be unexpected?
Well, maybe one of the things that maybe we over-index for a little bit is in looking for teams that we think will be able to pivot.
We’ve just done this long enough that we know it’s so rare that something is just a straight line and the company, what they say they’re going to be when we invest in them is what they are long-term. It’s a balance — you want to have very high conviction and the very strong belief in what you’re building, but also not be so hard-headed that you’re unwilling to listen to other perspectives or willing to sort of poke holes in your own model.
That’s a lot of feel though. I mean, when you meet a lot of people over time, you sort of get a feel for somebody who is willing to acknowledge that the product needs to change. Interestingly, as we think about Air very specifically, they are a company that’s the product of a pivot. We met them earlier and invested about a year after meeting them, because they had shifted their strategy and their go-to-market quite meaningfully, and I think that they were really living proof of a team that was willing to continually revisit their hypothesis for what they were building and look at the data that they were getting back from their users and be willing to make changes.
What did that look like specifically?
They started to build what was sort of the traditional enterprise SaaS business; in fairness, in the early days I think they weren’t sure exactly what they were building. I think they started to move in the direction of thinking that they needed to build something that was going to be a little bit more of a longer lead sales process, more last-generation of SaaS.
What I’ve seen sort of firsthand at Group Nine is how the SaaS products that we’ve been adopting are really bottom-up. They’re products like Airtable and Slack that we’ve seen different groups of people in the company start to use an individual team, and then over time you will see them sort of permeate the workflow and suddenly become tools that the company can’t live without, versus the sort of corporate-mandated tool that everybody has to go and use.
Now, it’s a lot easier said than done to build a product that sells in through the people and through the team. Building something that has that sort of robustness and potential scalability, where it could be a product that everyone in a company could use while also being something that could have a single-player mode, is not easy to do.
I’ve heard more and more startups talking about that idea of a single-player mode. Is this just an evolution or does it feel game-changing?
It makes decision-making around a SaaS product exponentially easier, because so often you pay a lot of money for some product, you run it through some sort of onerous RFP process, you select something and then the body rejects the organ.
I think you risk that in almost any large SaaS integration, and more often than not, when you sign a SaaS contract, you’re basically taking the lesser of two evils, because nothing is ever exactly what you want. One of the philosophies that we have and that I think a lot of good investors have is to invest in the obvious; you can overcomplicate these investment decisions and talk yourself into or out of everything.
Adobe is an amazing suite of products, but with the idea that companies are mandating the tools that their employees use versus letting their employees choose — it makes a lot of sense that teams are going to ultimately end up having more autonomy and creating better work when they’re using tools that they care about. And so, I’m sort of smitten with the idea of SaaS businesses that are not only reliant on an enterprise sale to get picked up by accounts.
Given the volume of deals in the SaaS productivity space, how hard is it to decide where to place a bet right now?
We’re in the generation of the entrepreneur, right? There are 50 people trying to tackle every good idea. For us at the fund, we look at areas where we feel like we have some institutional knowledge or advantage. So, working in a media company which thinks a lot about how we archive, keep, share and collaborate around content, I think I had a sort of pronounced understanding of some of the challenges in [Air’s] specific category.
Generally speaking, it’s easier to make an investment in a company solving a problem that you understand as opposed to one solving something theoretical.