Stephanie Palmeri invests with micro VC fund SoftTech VC, where she leads deals in next-generation commerce & marketplaces, mobile services, SaaS, consumer health, and EdTech startups – including Poshmark, True & Co, Clever, Handshake, Grovo, Panorama Education, Lantern, and ClassDojo. Stephanie currently represents SoftTech as board member for Chariot, Educents, and Fatherly and as board observer for numerous investments. She previously served as a board member for Niche (acquired by Twitter).
Before moving to Silicon Valley from New York City in 2011, Stephanie spent a decade working at the intersection of marketing and technology with startups and seed funds/incubators (like Lot18 & NYC Seed) and large corporations (Accenture, Estee Lauder, SAP AG). Stephanie has an MBA from Columbia Business School Stephanie holds an MBA from Columbia Business School and graduated magna cum laude from Villanova University with joint degrees in Marketing and Management Information Systems.
Stephanie Palmer of SoftTech VC joined the Startup Grind Global Conference in 2016. Read our highlights and catch her full talk below.
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Tell us a little bit about your background.
My background is in marketing and technology: I started my career as a technology consultant, spent a number of years in marketing and joined SoftTech VC about 5 years ago. I spent the first decade of my career in New York city and I’ve been in Silicon Valley for 5 years now.
In addition to corporate boards I’m on, I do a lot of investigation in marketplaces, consumer health, education technology and SaaS companies, particularly those in sales and marketing tools.
Now, about SoftTech: we are currently investing out of our 4th fund, managing $85 million dollars. We have 4 funds in the firm: historic funds that we continue investing in existing companies, and we currently are investing out of the $85 million vehicle.
We have invested in close to a 180 startups in the almost 12 years that Soft Tech has been in business. Our companies have raised over $2 billion in follow-on considerations, and have exited for over $2.5 billion dollars in M&A. We had our first IPO with Fitbit.
How does SoftTech invest?
We are investing in about 45 companies per fund, which averages to about 14 to 15 deals per year. I’m typically writing a cheque that’s minimum $500,000 but can easily go up to $1 to $1.2 million in a seed round. Those seed rounds are typically $1.5 to $3 million total.
I’m taking a board seat on about 1/3 of the companies in which I invest, which is true across the firm. We target ownership: we care about owning a big chunk of your company because we do spend a lot time with our investments. We try to own 7 to 10% of a company when we invest.
In terms of geography, we are looking at Silicon Valley and San Francisco (about 75% of our investments), the East Coast (15-10% of investments) including New York City and Boston and one in Philadelphia, and we have a small amount in Los Angeles and more recently, in backing Canva, have gone into investing in Canada, in the Waterloo to Toronto corridor.
My final point: when we invest, we always invest with a syndicate. We’re never the only one writing a cheque.
What are the profiles of the companies in which SoftTech Invests?
When we invest, we invest in 3 things, which we call our “Three Asses Rule”: smart-ass teams building kick-ass products in kick-ass markets.
Are there opportunities outside of SoftTech’s investment zones for people to meet the criteria of the 3 Big Asses?
On geography, I’ll say why we don’t invest outside of these geographies. We kind of have to filter it down in some way. Geography is one of those ways.
We are pretty hands on with our companies, so there are two things we need: we need to make sure that we can spend the right amount of quality time with the CEO & founding team, which is easier when they’re based locally.
One of the reasons New York works really well for us is because I’m on a plane every 6 days of the week, for a week at a time, spending time on the ground in New York. We know some really strong investors in New York and have an ecosystem there, so we have more than one company there. Though I’m not there all the time, you’re never alone.
But if you’re asking for investment in Phoenix or Chicago or Austin, we simply don’t have that network on the ground that we trust, and we don’t have founders there that we know and trust. We don’t think we can support you properly there.
So in your position, I would look for someone local. You may have more success with an angel that are more institutionalized that invest in those markets.
The good news: it takes less capital to launch a company in a non-major market. YOu might be able to get the company to an interesting point in revenue wherein an investor who only does one or two deals a year might be happy to get on a plane to Phoenix. It’s harder with the volume of deals that we do.
When looking at the financials of a company you’re planning to invest in, how many years ahead do you want to see projections? What are the numbers you’re looking for, that you consider investable?
The reality is most of the companies we’re investing in have a tiny bit of revenue. Some of them are pre-revenue. We make the assumption that all of these companies will earn revenue at some point, and we need to see a clear revenue model.
At seed stage, I’m a lot less interested in looking at your 5-10 year projections. It’s really important for me to understand what your operating plan for the next 18-24 months looks like, because that’s what I’m putting money in.
I’d like to get a good idea of what your burn rates looks like over that period of time: the key hires you want to make, what you plan to spend on marketing, and then almost zero out the revenue number because in many cases you’re actually not making anything in the beginning.
The next thing I am thinking about: how do you get to a million revenue? How do you get to $5 or 10 million revenue, and what does it take to get to the $50 or 100 million dollar revenue? How many years can that be achieved in, roughly? How many users might that be? How many customers might that be?
But I know it’s fiction.
A lot of investors talk about sustainable business models, rather than building a Unicorn business. How do you look at this tension?
Unicorn meaning a billion dollar company that does not justify that billion valuation and maybe has no revenue yet? We don’t invest in a lot of those things - happily. We comfortably decided to shift away from investing in companies for which we didn’t see a clear revenue model.
When you invest in SaaS, and 50% of our revenue is SaaS businesses, we are looking at revenue from day one.
A lot of companies are coming in and doing maybe $20,000 or maybe $40,000 monthly recurring revenue before we even put any money in. So yes - we are looking at sustainability. At the same time, we expect capital to fuel growth. We’re not looking for companies that are going to raise money once, get to break even, and build a really nice business for yourself and maybe for angels. We’re looking for venture-size returns.
Have you seen valuations go down in the recent years?
Yes, certainly. We’re starting to feel more pressure and I think that’s a good thing. The reality is we’re entering into a market where investors at all stages are going to be a little bit more sensitive to pricing.
It’s a lot easier to multiply an investment if the investment is smaller. At the end of the day, you’re focused on growing a big pie - as big as possible. Fighting the nuances about valuation can sometimes be the best case of anybody.
How early do you track companies and how do you build relationships before you invest?
We track companies that are, frankly, under the radar and off the grid. They maybe have a public product but they’re still relatively small. 99.9% of what we look at and pretty much 100% of what we invest in comes from the introduction network.
So because you’re typically going to be raising maybe $100,000 to $500,000 before you’re ready for the multimillion dollar seed round, it’s likely you’ve raised some money from an angel or two, who besides being a great source of capital for you are a great source of introductions for us. Surrounding yourself with great advisors is a really good way of showing up on our radar.
How long it takes for us to get to know a company varies. There’s a rare care that we have spent a month getting to know a company coming out of an accelerator program, where things move really rapidly. Most of the other deals, we’ve gotten to know founders for over a year before we’ve actually made the investment.
The tricky part is this: let’s say you raised $1.5 million and you come back for another $1 million from us down the road, that’s probably not something we’re interested in investing in. You’ve raised a little too much capital for it to make sense for us to get involved.
How does SoftTech VC treat hardware companies?
That’s a great question. There are a lot of differences when you’re investing in hardware.
First and foremost: hardware companies, instead of raising $1.5 to 3 million, are targeting $3-4 million out of the game for a seed investment. So we know it’s going to take you a lot more capital to get to market.
Secondly, we’re even more critical about the technical talent on the founding team of a hardware company. We really need to understand that you have the right core group of engineers to bring a product to market. It’s really, really critical that you have bench talent that understands that.
The third thing: we don’t usually get to invest in a hardware company that’s live and in the market. It takes you several years to actually bring a product to market. So our expectations with a hardware company are to invest in some kind of prototype.
You have most likely likely not gone through pre-sales yet, and half of what you’ll use that seed round for is to get to the point where you’re almost ready to launch a product. It will vary from company to company but I would say we almost expect our hardware investments to be earlier than our software investments. That’s why they raise more money.
When it comes to crowdfunding campaigns, they can be a fantastic signal, but they can also be indicative of a chicken & egg problem. If you sell millions of dollar worth of products and it does look like you have that must interest in the campaign - that is, you didn’t have the marketing dollars to juice it - it could be a winning shot, I would say.
I certainly think it’s really nice for you to have some level of proud funded traction as a hardware company. It doesn’t have to be for the main product you’re launching. Really, what you’re trying to do is demonstrate there’s a market for the product and an active engaged community that’s excited to use to product.
When it comes to investing in marketplaces, how do you evaluate the value of the network?
That’s a very good question. I invest in a lot of marketplaces, though I have never invested in a pre-launched marketplace. Typically, you want to have some level of traction, on both the supply and demand side of a marketplace. It’s more easy to get one side than the other. The key is figuring out what the most difficult side to bring onboard is, and begin to unlock that.
One of the most important things I look for in a marketplace company: what’s their take from the marketplace? Is it repeat transactions? Am I coming back to the marketplace to transact with the same individual, or are there network effects that make more suppliers on the network beneficial for the buyer?
I like to look for repeat behavior and interactions with different suppliers in the marketplace.
Any final advice to share with the founders in our audience?
My final words would be this: if you’re building a company, keep on going. It’s never going to an easy journey.
My biggest piece of advice for when you want to get to know investors for your companies is to get an introduction.
I pulled the numbers the other day for deals that we look at at Soft Tech: in any given year we see about 2,000 to 3,000 opportunities.
50 of those opportunities get to due dilligence each yet. We’re talking to references, customers, met their entire investment team - we’ve talked to everybody.
15 of those companies get an investment.
How do you break through the noise? Great metrics, and with an introduction by someone who really knows that VC well - someone who can vouch for you, and for the VC.
Best of luck.