The Rise of Operator Investors

[00:05:06] Kjael Skaalerud: And just one quick thought. You would think intuitively that the failure rate would go down over time?

[00:05:12] Mark Roberge: Yeah, like who would’ve thought that the failure of the series C funded businesses? And that just statistically said to me that as an ecosystem, we’re not very good at scaling.

[00:05:25] And I started to explore that and reflect on it. And I realized that so many of the gigs I was involved in and the companies I was watching that failure came back to them answering two strategic questions poorly, and that was –  When should you scale? And how fast? And so if I unpack that a bit, and honestly, I think that some of that was driven by the founder’s execution, but the investors weren’t helping the board, wasn’t helping,

[00:05:59] Kjael Skaalerud: They’re saying, Hey, let’s hit the breaks.

[00:06:01] Mark Roberge: It was hurting them honestly. And so what I saw was. First off the decision on when to scale was just inadequate. A lot of them were like, well, they all say when you have product market fit, but then when you ask them what’s product market fit, they’re like, oh, we have five beta customers.

[00:06:21] Kjael Skaalerud: Some of them pay us. Right?

[00:06:22] Mark Roberge: Yeah, exactly. That’s a key question. We need more than that. And then once they decide to scale, it seemed like some board member, maybe were on the board at Snowflake, and they’re like, oh yeah, this was Snowflake’s year 1, 2, 3, 4.

[00:06:38] So let’s just do that. And it’s like, are you kidding me? You have to understand what the capabilities of this organization are to determine how fast they can scale, not like some other peer company. And so that’s thinking, right? So that’s what I developed, was a framework that I called The Science of Scaling.

[00:07:00] To help organizations use internal data, boards, and founders to use internal data, to decide precisely when they’re ready to scale. And then once they’ve done that, how fast they can scale. And so you can, you can go to Stage 2’s website and download that, and it’s taught at Harvard, it’s taught at MIT.

[00:07:20] It’s taught at other places and you know, I’ve been at it for five years with that.

[00:07:24] Kjael Skaalerud: I’ll plug it too, The Science of Scaling. I mean, obviously sales, acceleration formula is gospel. Right? Are you gonna publish The Science of Scaling?

[00:07:32] Mark Roberge: I hope so. I need to find the time. Largely because I wanna donate the proceeds of the Sales Acceleration Formula  to a great nonprofit called build.org. And I would love to publish the science scaling to help a broader set of the ecosystem, but also to donate the proceeds to something around mental health. So I’m, I’m trying to find the bandwidth to do that.

[00:07:53] And honestly, every quarter I make it a little better, but it’s ready for publishing. It’s good. I think it’s fine enough. I just gotta find the time.

[00:08:00] Kjael Skaalerud: I would definitely go to Stage 2 Capital and then check that out.

[00:08:03] That’s definitely an anchor piece of content that I live by. I know I got this question, a little foreshadowing coming for you later, and I was curious if you were gonna do a plug, but that’s one of the things that I most often give to people.

[00:08:13] Mark Roberge: Thank you. You know, anything that can decrease that failure rate and get out there.

[00:08:18] It’s free, whatever. Just go do it. And just so you know, the Sales Acceleration Formula that Kjael mentioned is the book that I wrote at the last year of HubSpot, because at the time I was sort of known as this data-driven sales leader, and it just talks about how I use data really aggressively within the HubSpot sales org to drive scale. 

[00:08:37] And so if you wanna check that one out, you can, all the proceeds are donated. So anyway, that’s what was happening. And then in 2018, I had a call with my co-founder J Poe, who was at Bessemer at the time. And he was like, oh yeah, I’m a revenue VC.

[00:08:58] And I was like, what is a revenue VC?

[00:09:01] He’s like, I don’t know. He’s like, I’m looking around my peers and a lot of them came from banking and other places and they’re great investors, but like, I don’t understand why they are on these boards, advising these companies afterward, because they don’t have any operating experience.

[00:09:18] And so much of this is just about driving sales. So I want to be a more value-added VC. So I’ve actually been going to SDR school on Saturdays for the last couple of months to learn how to cold call. And I actually have a job offer to become VP of Sales at one of our portfolio companies. And I started asking Jay questions.

[00:09:39] He was like, crushing it. And he’s like, Hey, do you wanna do a go-to-market accelerator for the best of our portfolio? I’m like, yeah, sure. I’ll do that. So we did that for a couple of months and then. He’s like, yeah, this is a fund. I’m like, what do you mean? This is a fund he’s like, we need to go out and we need to start the first fund.

[00:09:58] That’s running backed by sales, marketing, and customer success leaders. We need to go get the most famous, successful, go-to-market executives to invest in our fund and then go bring that knowledge to the next generation of entrepreneurs and their ventures. And I was like, that would be big if you could do it.

[00:10:22] Kjael Skaalerud: And that sounds like fun.

[00:10:24] Mark Roberge: Yeah. I’m like, I don’t know you that well, to be honest with you, but here are my 12 friends that are CROs at public SaaS companies. Just go talk to them. And not only did he come back with 12 checks from them but he came back with like 60 referrals of other friends who needed to be part of this.

[00:10:42] The way we set up the fund was we could only have 99 LPs and we maxed that out pretty quickly. And then we went out and started to test if the entrepreneurs liked it.

[00:10:52] Kjael Skaalerud: Yeah. Sorry if I can pause right there too. Cause like kind of conventional method, right?

[00:10:56] Is LPs don’t necessarily have any domain expertise. What they’re looking for is diversification, right? They’re capital allocators. So it’s kind of turning that model on its head, right? 

[00:11:06] Mark Roberge: Yeah, Pension Funds, Endowments, you know, which it’s true.

[00:11:10] I don’t know, you actually probably Kjael, in your position, would have a better perception of how this might revolutionize the VC world, or does it have a place? My current instinct is not necessary. I do believe that the non-operator, career banker investor hedge fund turned venture capitalist is a pastime.

[00:11:40] Like I never understood why. They’re great investors, but I don’t understand why they’re so influential on the operational strategy after.

[00:11:51] Kjael Skaalerud: Yeah, well that’s a big question mark too, right? Yeah. Just real, real quick before we move there. Cause I kinda share that vibe.

[00:11:57] Right. But if you think like traditionally an LP gives you capital, happy days, right? In your environment, an LP provides capital, but they also have an ecosystem of companies that supports origination. They have expertise that they can lend. So it’s almost like you’re distributing the function of a GP kind of into your LP.

[00:12:16] So it’s a much more kind of synergistic relationship. So to me, when I was early days, when I was learning about Stage 2, it was like, wow, this makes a shitload of sense. And obviously, operationally, how do you codify that knowledge and distribute it amongst the portfolio? How do you coach them around what’s a good potential investment versus a bad one?

[00:12:31] There’s a lot of stuff to kind of pull it down to the ground. But that was the first thing that kind of stood out to me. And I think to your point too, simple observation is, a VC sits on 10 boards and they’re giving advice with way less than perfect information.

[00:12:47] And a lot of that stuff is they never walked in the shoes not even once, right? Let alone two or three or four times where they can call out blind spots or pitfalls that they’ve seen in a different context. So, I’m with you, I’m not really sure that makes a ton of sense, but it’s super common.

[00:13:01] Mark Roberge: Yeah, I call it the inappropriate cut and paste where like an investor or board member sees success story here and then tries to put it here without regard of the contextual differences. That’s where a lot of this stuff, whether it’s like hiring a sales leader or a demand gen strategy or a compensation plan or a pricing model or a growth model or whatever.

[00:13:28] These are all contextual. Like what are you selling to who? And at what stage, and a lot of folks without that operating instinct, messed that up. And that was one of the motivators for me, was the strongest voice at the table was the big investor, regardless of background or whatever. 

[00:13:50] So anyway, I’m not trying to say that investors are dumb or that all board members don’t know what they’re talking about. My only point is it did seem like in the overall ecosystem, there was a substantial missing piece, which is someone at the investor’s seat that knew a lot about driving revenue. And that’s really what we tried to fill.

[00:14:14] Kjael Skaalerud: Well, and then in your thesis too, right? Like, is that condition correlated with the same failure, right? Despite growth in capital, right? It’s like, well actually, where’s this advice coming from? It’s like, Hey, you’ve got product market fit. Why don’t you hire 50 people? Because we all know that bookings are a function of quota.

[00:14:34] It’s like, oh, well, shit, we have to pay these people. And now we’re outta money and they didn’t generate sales because quotas don’t equal bookings. And it’s like, yes, an operator would’ve probably told you that.

[00:14:43] Mark Roberge: There’s a long list of common themes you’re hitting on them. Oh, gosh, it’s working.

[00:14:49] Let’s hire 20 sales people next month, without the regard of like, when you have two sales people and you try to hire 20 in a month, like how many interviews that is, who’s gonna onboard them? How many managers do you need, and how many leads do you need? Just a lot of messes, and unfortunately most companies do that and it fails.

[00:15:11] Other advice is, go find someone who’s been there, done that. You’re at a million in revenue. I gave you a bunch of money. You want to get to a billion-dollars, like go find a CRO that’s run a billion-dollar company, it happens all the time. Terrible hire. Terrible hire. At that stage.

[00:15:28] Kjael Skaalerud: Yeah, or go get a Salesforce rep for somebody from like a totally established, enterprise sales environment and poke them in a series A business, and it’s gotta be the same. 

[00:15:39] Mark Roberge: Selling salesforce.com versus selling for a series A funded company with a brand that no one knows. It’s so different. So anyway, there’s just like a long list of those common themes and that’s what we set out to do. And it was really valid by the entrepreneur community as well.

[00:16:00] Fund one has performed well, and then in 2022, we raised fund two. We set out to raise 50 million bucks and a major endowment, in the university arena that we’re psyched to be partnered with came in with a large check on top that put us well over. And then we just recently announced 150 million. So, yeah, the network has grown to over 300, of these folks, you know, the CRO, CMO, CCOs of like Snowflake, Zoom, Asana, Salesforce, and SEP.

[00:16:30] And I think we’ve got a large percentage of the software 100 or whatever you want to call it, covered. And, every day it’s a humbling honor to play that accordion. And, we get half our deal flow from every deal that we diligence, we bring in half a dozen of them based on their industry experience and every deal we do over the course of the next six months, they’ll talk to probably about 12 of our LPs, whether they’re building their first customer success team or sending it up an ABM program or tweaking their pricing model.

[00:17:05] We have the person that probably wrote the book on that to help them. And so from the LP standpoint, it probably on average, they might do like two calls. So we have a two-person investment team. One is a former, go-to-market exec, teamed up with a traditional investor to really understand the context and be able to pull in the right person at the right time and provide them with the right context to, to make sure that that experience is a value-add and to not over-rely on this network of very busy people, but use them very effectively.

[00:17:39] Kjael Skaalerud: Beautiful. And then now extending into an accelerator?

[00:17:45] Mark Roberge: Yeah. So honestly we don’t think this model is unique to, a US-based play at the stage that we invest. We invest in companies that are between seed and A, around a million in revenue. And, you know, the concept of bringing go-to-market expertise.

[00:18:04] To help entrepreneurs is not restricted to that location or stage. This could easily be expressed in seed and a growth fund in Asia and Europe and Latin, whereever. And that would be the long-term vision, but we gotta take baby steps. And so, we kicked off our seed strategy last year in stealth and came up with a go-to-market accelerator.

[00:18:24] So businesses with say tens of thousands or low hundreds of thousands of ARR, that are thinking about building their first go-to-market org. And we put them through our 10-week course that you’re part of. How do you hire your first rep? How do you pay them? How do you set the first price and model?

[00:18:40] How do you set a cold calling campaign? How does PLG work? You know, just all the first of building that program, and this year we publicly announced it. We got about 400 applications and chose 15 companies. And so we have a small vehicle that is backed by the emerging leaders that we hope will be LPs in our flagship fund down the road.

[00:19:01] But in the meantime, they’re extraordinarily smart talent individuals who are managers and directors at some of the best companies out there that are trying to learn how to become angel investors and advisors and board members. And we provide a vehicle for them to practice and learn that.

[00:19:18] Kjael Skaalerud: Beautiful, good stuff.

[00:19:20] And I love just the kinda the compound. If you will, of all those activities, right? And how one feeds the other and kind of all while lifting the tide for all the boats. That’s good stuff. So one, one question for you. So I guess one of the first trends that was called out and kind of publicly acknowledged was that family offices were starting to basically ingest private equity capabilities.

[00:19:46] So instead of parking capital with a private equity shop, they would bring those kinds of capabilities in house. And I think if we just kind of agreed that Stage 2’s model is a little bit of an inversion of what’s traditional, where the LPs are bringing capital, but they’re also bringing pointed expertise.

[00:20:00] They have exposure to, I guess asymmetric deal flow prop deal flow. I guess, do you see the traditional GP/LP model changing over time and becoming something that’s a little more distributed and where the value exchange isn’t so much capital and returns? Any thoughts on that stuff?

[00:20:19] Mark Roberge: Yeah. I saw that question and I don’t know if I have a lot of insight on that, to be honest with you. I know it looks like I do because of the way we set our things up, but This came from the thing I believe strongly in which I think almost everyone does, which is the VC who only has investing experience.

[00:20:41] It might go away a bit. Maybe we shouldn’t talk about it at the individual level, but at the firm level, if you’re like five partners who are ex-bankers and you’ve only invested, I kind of think that’s going to go. And that there needs to be some form of a strategy for value-add, and a lot of it was driven by the abundance of capital that’s out there.

[00:21:02] You know, if you were a VC in the eighties, capital was your differentiator. You know, and now it’s not, it’s really competitive out there and to get into the best deals. You have to have a big value add. Now people do that in many different ways. Like, Andreesen has an entire staff, right?

[00:21:21] And if you read the case studies on them, it’s crazy. How much rigor and operational expertise they bring to the model. There’s a firm back here in Boston, Underscore, that basically gives their advisors. Their own preferred shares in exchange for their advisement. And they have a roster of people.

[00:21:38] So there are many different ways to do this. We happen to do it with our LP base. And I think that’s a cool opportunity. It was a lot of work and has been but that doesn’t necessarily mean that you’re not gonna have funds 10 years from now that are exclusively backed by like the Vanderbilt in George Town.

[00:21:57] Endowment and the GE pension fund. I still think that’s fine but the LP base certainly does present an opportunity to create unique value-add, and that’s what we’ve exploited.

[00:22:09] Kjael Skaalerud: Totally. And I think the other kind of interesting anomaly too, is minted tech entrepreneurs.

[00:22:14] I think that was another thing too, where, you know, like, Hey, what goes into a fund and how does this work? And that’s where we’re seeing the landscape change a lot, you know, because they start to fund the first thing they do is stand up a data warehouse and they get clear on like their investment thesis and they approach it.

[00:22:30] Defining an ICP and go-to-market and thinking about like almost like fund investor fit. And they’re just bringing kind of these frameworks that are super I guess, translated from like SaaS and go-to-market world. Or you have folks that are coming over from hedge. And especially, I think we’ll see for the first time ever, that there are more private fund managers than hedge fund strategy fund managers.

[00:22:50] And so, those folks are used to, and I joke about this all the time, but it’s like, you know, we’re gonna take satellite images. And, correlate that with target transactions and we’re gonna speculate on peanut production, and it’s like bringing that kind of outlook to private capital markets investing is just very different.

[00:23:06] So the landscape is changing a lot and it’s interesting. But to your point, capital is a flush. So the days of, Hey, here’s a check and that’s what we’re bringing to the table.

[00:23:14] Mark Roberge: It raised a good point, Kjael, and I’m very early in the anecdotal observations here, but my current hypothesis and observation is, let’s say if I had to choose between a VC managing director who was a CEO of a company that they took from zero to IPO multi-billion dollars versus a hedge manager that now is coming to VC and is running a fund as an entrepreneur all day. I’m going with the former CEO all day. As an LP.

[00:23:54] I do know because my anecdotal observation is that the former operators have just hands down exceptional instincts around these businesses, what it’s like to sell into the market, like call BS on the strategies that aren’t gonna work. And then certainly after the fact, being so valuable to tipping the board in favor of success, had they not been involved, but I do find that the X operators don’t do thorough diligence and are more apt to invest in problems because they know how to solve them without recognizing that they’re gonna have 20 portfolio companies and they can’t be as intimately involved to solve those problems. 

[00:24:43] The hedge fund manager is gonna do like 5x more diligence. All the customer calls know exactly the thing, see the future, all wonderful investors. But then after the fact, I hope they don’t talk too much in the board room, outside of like what they know about, which is like the macro effects.

[00:24:59] So as an LP, I don’t know which one I’d rather bet on. I probably would rather go with the hedge fund investor, but that’s why we do our model the way we do, which is from the beginning of the deal analysis, we have the traditional investor with the go-to-market investor. So they’re both bought in and we can get the best of both worlds.

[00:25:19] Kjael Skaalerud: Wow. Good stuff. Ah, thank you again for sitting with us on this podcast, Mark. Very, very good stuff. So one more question, and then we can start to wind down here a bit, but so a good chunk of our audience is obviously on the GP side. And I think, you know, the headline right now is recession and economic downturn.

[00:25:36] And a lot of the stuff that we’re hearing is just more rigor around portfolio monitoring. And I guess no matter what the market is, there’s some cohort of buyers that’s advantaged. And we could say that in a recession, valuations get course-corrected back to more rational numbers.

[00:25:54] And it’s a good time to be in capital allocator, but I guess, as you’re thinking about, okay, the potential for a recession. What are some things that are going through your head that might be useful inputs or stuff for your fellow GPs out there?

[00:26:08] Mark Roberge: Yeah. I mean there’s a lot of stuff that’s already been said before.

[00:26:11] You know, it’s always the typical playbook, to go back, understand runway, make sure you get like 18, 24 months plus in every single company. That’s all the standard stuff that I think everybody knows it’s a great time to be investing right now. I think someone put it best with this particular, downturn so far, we don’t know how deep it’s gonna go, but it’s almost like, you know, if, if we look at it as mostly triggered by the low-interest rates, which caused the fixed income opportunities to be, not very good, which shifted a lot of demand toward our equities, specifically growth equity, specifically tech, which caused a price-to-sale ratio.

[00:26:50] They have historicized, which led to a price-to-sale ratio and the private equities to be enormous. And it’s almost like we have to like draw the line. And it looked like this and it came down to this and it’s just gonna go like that.

[00:27:07] So just pretend like that never happened.

[00:27:12] Mark Roberge: If you’re working at Snowflake right now and you are worth like 8 million in 2021, and now you’re only worth three. 

[00:27:25] Like the PS ratios are back in order and what that means for us, is we’re looking at our portfolio and we have a lot of opportunities to buy more ownership in plays that we like at valuations below what they were last year. And essentially what it means is, it’s almost like if you add up the capital we deployed in the ownership.

[00:27:51] It’s almost like 2021 never happened. It kind of came back to something closer to normal. So, that’s been a cool opportunity. I think the one thing that I find to be important and I don’t think is discussed a lot as the GP and this is gonna hone into my go-to-market lens, but I think it’s useful at the board discussion is there is a very high likelihood that the ideal customer profile, the target customer, that it was optimal for this business that you invested in and the message by which they went after that target market, is now suboptimal given this economic conditions. You know, so what I’m saying is this downturn, like most downturns is felt differently in different markets.

[00:28:43] Tech, growth tech, is laying people off. Other sectors are like there are layoffs happening? So there’s a really good chance that whatever this venture you invested in learned in 2019, 2020, and 2021, in terms of the optimal market and the message by which to go at that market now needs to be pivoted.

[00:29:03] And it’s really hard for entrepreneurs and founders and senior leadership teams who are in it every day to see that. And that’s the opportunity that we have at the GP level. And the board level is to really challenge them on that and challenge them to pivot faster. So just as an example, people selling at the growth tech in Q4 last year with a growth value proposition cleaned up and today, no way.

[00:29:31] But, if you’re selling like a do more with less value proposition into industrials, that’s probably really good for this economy. So that’s something I think is important across the board that is different than the typical, like shore up capital.

[00:29:50] Kjael Skaalerud: Totally. And I think what’s interesting, is I think a lot of us, especially when you’re in the trenches operating, when something starts to land from a messaging or an ICP value prop alignment perspective, you stick to it and you forget that target moves and that you iteratively have to follow it.

[00:30:05] To stay in tune with where the market is. And so, you know, don’t be afraid to change course and kind of do it and obviously be data-driven in your decision, but that it is an iterative process. Just like product development is an iterative process, right? And there was an OG sales mentor of mine that would say, no matter how you slice it, you got three customers, right?

[00:30:22] The customers that are growing, the customers that are maintaining the status quo, and those that are in structural decline. And it’s okay if certain cohorts move across that spectrum, especially as economic cycles hit, you just need to make sure you know, which groups are where and what the value prop is.

[00:30:36] And it either will help you grow or save you money. That’s really, really good stuff. Last question for you, my friend, and this is a personal one, and been a fan of Ferris and I always loved that he was able to get to the root of stuff and he was a big advocate of, how do you sequence questions?

[00:31:00] Instead of asking, what’s a book that you recommend the most? It’s what’s a book that you’ve given away the most? And if it’s your book, that’s all good. But if there’s something else, then I would maybe swap the question out with, who’s somebody that you follow that you think is kind of progressing the sport or pushing the envelope or just somebody whose content you’ve been kind of enamored with lately?

[00:31:19] Mark Roberge: Hmm. Yeah, I read a lot of different people. I would say that most recently I had an awesome experience on The Grit Podcast with Joubin over at Kleiner Perkins. He’s been trying to get on my radar for a year, we’ve been trying to meet each other and finally was able to make it happen this summer on campus at Harvard, and he’s the best interviewer I ever had.

[00:31:43] I mean, you’re a great Kjael, but this guy started out he’s like, I read every piece of content that my interviewees write. He’s like, I couldn’t do it for you, you wrote too much, but like he knew stuff that I’d forgotten about myself. We dug in deep and it was awesome.

[00:32:03] And so since then, I’ve been really enjoying listening to The Grit Podcast over at Kleiner. And for perspective on the industry, he’s got some rockstar operators out there. So if you hadn’t heard of that one, check it out.

[00:32:14] Kjael Skaalerud: Beautiful. One quick follow-up question, was there a best question he asked you, where you’re like, damn that cut through all the noise? 

[00:32:22] Mark Roberge: We had a really deep conversation about anxiety.

[00:32:25] You gotta go check it out. It is like an hour long, but I got a lot of great emails about it. You know, I’m pretty vocal about my battles with anxiety, and I had really deep, bad anxiety, like life-impacting anxiety that got in the way of me being able to do work.

[00:32:47] And I had a struggle a couple of times coming back from it. I’m on medication. I’ve been in therapy for 10 years. I think everybody should. And I just, we had a really good conversation about that and I always try to speak out about it, because the stigma sucks that you have with it.

[00:33:03] A lot of people hide it and it’s too bad. You don’t really hide cancer, but you hide anxiety and depression. And I think we’re crawling out of it. I think this next generation is much more empathetic and understanding of mental health, but for whatever reason, some of the things that happened in my life, society values success.

[00:33:23] So, I can be a little more risk-taking, I suppose with saying these things. So we got pretty deep on that, which is pretty cool.

[00:33:30] Kjael Skaalerud: Cool. So get into some vulnerable topics. I think that’s always a good signa that you’re having something meaningful conversation-wise.

[00:33:39] Well, right on Mark! Ladies and gentlemen, check out Stage 2, check out all the extraordinary content. I’m a huge advocate. And thank you again, man. We know you’re a busy guy, so I appreciate you hanging out with us.

[00:33:51] Mark Roberge: Oh my pleasure, Kjael. Thank you very much.