1Mby1M Virtual Accelerator Investor Forum: With Susan Mason of Aligned Partners (Part 2)

Sramana Mitra: Very much in alignment with the philosophy we practice here is capital-efficient entrepreneurship. We encourage our entrepreneurs to bootstrap as much as possible and do things with not too much money such that you end up with not very much in wealth creation. You raise a lot of money and perhaps build to a certain amount of scale but don’t really get exits to justify that level of fundraising, which happens rampantly in the industry.

I fully appreciate what you’re saying in terms of building businesses within $10 million so that the wealth creation equation actually works for everybody. We are at a point in history where a lot of enterprise technology has already been built. A lot has been deployed. Sitting almost at the end of 2015, where do you see the opportunities in enterprise technology in general that you can point our entrepreneurs to that is worth building new companies at this point?

Susan Mason: I think there are huge opportunities out there. We continue to see more and more opportunities opening up. One distinction that I want to get clarity on, is we invest on SaaS model software only. It’s very hard for a hardware company to build capital efficiency. In the software area, we see a lot of opportunities in healthcare IT. We think that marketplace is undergoing a lot of changes. The end customers are looking for new solutions and new ways of doing things.

We love fin tech. We think that is an area that is ripe for change and is very amenable to capital-efficient types of investment. Within the enterprise itself, we also see opportunitiesi in the infrastructure whether that’s in the financial enablement within the enterprise. We also see opportunities in security. We don’t see any paucity of opportunities for entrepreneurs. Counter to that, we see huge market opportunities opening up. If they can enter those markets in a capital-efficient manner, I think everyone in the table wins and in a much lower risk strategy.

Sramana Mitra: Based on what Susan just mentioned, I would like to point you to a few discussions that we’ve had here in each of these categories. Healthcare IT is something we’ve covered extensively both on the blog and also in the roundtables. Girish Navani fo eClinicalWorks has actually bootstrapped a unicorn. It’s 100% self-financed that is over $300 million in revenue. It’s really kicking ass in the space.

Relatively recently, we had Dan Cane from Modernizing Medicine. That’s another very interesting healthcare IT company. That one has raised a lot of capital but is also doing really well in terms of its metrics and numbers. In fintech, the companies that I want to point you to in the context of this capital-efficient enterprise SaaS model is Blackline Systems.

Therese Tucker, who is the CEO of Blackline, was here a few months ago. She bootstrapped to a very significant stage – several tens of million of dollars in revenue. It was followed up by a private equity deal with Silver Lake Partners. It’s getting ready to go public next year. It’s close to $100 million in revenue at this point. They do bank reconciliation for enterprises. These are just some examples of the kinds of things that Susan is pointing to. The trick is to find where the gaps are.

Question back, how do you view the issue of TAM? Does your capital-efficient model of business building allow for businesses that are more niche but with somewhat lower TAM than what the traditional VC is looking for? These days, it’s not even a billion dollar TAM – it’s like $10 billion TAM.

Susan Mason: We’ve seen entrepreneurs come in with the billion dollar TAM on their slides. We look at them and we say, “Do you honestly believe that?” Invariably they’ll go, “No, but we thought venture capitalists needed to see that. Therefore, we put that into the slides.” We’ve had many discussions on this point. What we like to see are companies that have a horizontal platform capability but can take a vertical approach to executing on that opportunity.

From a TAM standpoint, we’re less focused on the overall opportunity but more focused on the platform capability and then the vertical segments. Let me give you an example, we have a company called SA Ignite in the healthcare IT space. It is a horizontal platform but the first target segment was around the use case around the meaningful use in electronic health record usage by medical practitioners. That was the first attack point. That was probably a $200 million total opportunity. They executed on that very well.

The platform itself has the ability that once it’s secured a beachhead position in that initial use case vertical, using the same customer target, it moved to the pay-for-performance category. We are strong advocates of crossing the chasm philosophy where you have market one and product one. Rather than moving to a new market and new product, we like to see a second market but the same product, or the same product but with a second product.

Stepping across those two areas are the success strategies that we’ve seen. Even though the initial TAM may be small, what we found with our companies is that as you add up those subsegments and use cases, you aggregate it to a much larger opportunity, but it’s not evident from the initial entree. Those are the types of companies that we really like because they attract less cheap capital.

This segment is part 2 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Susan Mason of Aligned Partners
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