This article was originally published on Cintrifuse here, and written by Patrick Venturella.
Mark Achler is one of the founders of MATH Venture Partners. He has had an eclectic career as a serial entrepreneur – building four companies. He also served as a senior executive and head of innovation at Redbox. This is Mark’s third venture fund making him an investor with experience on both sides of the table.
We sat down with Mark to talk about what he looks for in entrepreneurs and why he likes Cincinnati’s startup ecosystem
Cintrifuse: What are some of the things you look for when you invest in companies?
MA: Our investment thesis is really straight forward. We care about three things.
First is customer acquisition. The majority of entrepreneurs do not understand sales. They are really smart, they have great domain experience, they can identify a problem and usually, not always, they can solve it. Still, 70% of all entrepreneurs fail – but no one failed because they had too many customers. So the first thing we look for in the core DNA of the company is if they can articulate a sales distribution strategy. We love companies that know how to sell. Period.
The second piece of our investment thesis is capital efficiency. We are a $28 million fund which is relatively small in the venture world. We’re not going to chase deals that require tens of millions or hundreds of millions of dollars in capital. Capital efficiency is important to us.
The first thing that we look for in the core DNA of the company is if they can articulate a sales distribution strategy.
The third piece of our investment thesis which is also a little bit different is we are the Anti-Peter Thiel. Peter wrote a book Zero to One where he said forget incremental improvements it’s all about new invention.
With all due respect to Peter Thiel, we have a different view. It makes sense if you are a billionaire, as a relatively small company ourselves, we like companies that have incremental improvements to existing business models. As hard as it is to acquire customers, we think it’s even harder to train a customer to do a new behavior – it’s really hard. When it works you have a giant home run but we’re not in the giant home run business. We’re in the better mouse trap business. The leverage isn’t our capital. Our unfair advantage as investors is our over 60 combined years of operating experience that we can use to help our portfolio companies grow and scale.
I’ll give you two examples. Troy Henikoff was the CEO of a company called SurePayroll.They were the first company to do payroll processing on the Internet and I was the lead investor in that company. We didn’t have to teach our customers that core behavior of paying your payroll tax. If you don’t pay your payroll tax you go to jail. We’re just using the Internet to make it cheaper and more efficient and we built a big company to do that.
Another example is Redbox where I was the head of innovation. People have been renting movies for 20 years from Blockbuster. We didn’t have to train our customers that core behavior to rent a movie. We just used supply and logistics to make it cheaper and more convenient. It was a better mouse trap – an incremental improvement to an existing behavior. That’s what we like to do.
CF: What kind of existing mouse traps do you think could be better right now?
MA: We’ve made 22 investment in our portfolio so far and I can give you some examples of that thesis. thinkCERCA is an Ed-Tech company teaching children grades 4 – 12 about how to read logic and construct arguments. Teachers are teaching those skills today but their platform is an incrementally better way to do it to do it – making it easier for teachers and students and they’re more effective.
We’re also an investor in a company call Acorns which helps millennials open up their first brokerage account. Brokerage accounts have been around for hundreds of years but this is mobile solution with a gimmick – they take your debit card and your credit card and tie it too your savings account and they get you to open up a brokerage account with an electronic traded fund. Every transaction on your debit card or credit card, they round it to a dollar and put that money in the account.
You don’t need to teach people to save money. People have opened up brokerage accounts before, this is just a clever way to get people to open up their first one.
Don’t talk to me about what you do, talk to me about what your customer needs. What is really important to your customer and why is it so urgent of a problem that they’d be willing to take a gamble on a startup?
CF: When you sit down with an entrepreneur or a founder, how do you know they can sell well?
MA: We talk to five entrepreneurs a day, that’s what we average at our shop. Most of the time when they give their presentation they start talking about feature, feature, feature – we do this, we do this, we do this.
Invariably I stop them and say “Talk to me from the voice of your customer.” Don’t talk to me about what you do, talk to me about what your customer needs. What is really important to your customer and why is it so urgent of a problem that they’d be willing to take a gamble on a startup? And talk to me from the language of the company you are trying to sell to. I’ll be very concrete and give you an example.
For a while I was the interim CMO at Redbox and we cared about three things. We cared about a lot about new customer acquisition of course, but the three metrics that drove our business were frequency, basket size, and nights out. Frequency – can I get somebody to come to the box one more time? Basket size – can I get them to rent two movies instead of one. Nights out – can I get them to hold it for two nights instead of one?
When you’re dealing with the volume of Redbox, small changes drive millions of dollars to the bottom line. If you talked to me when I was the CMO of Redbox and you didn’t address those three things, I was polite but I didn’t buy. So you have to understand the language of your customer. It’s not your language it’s their language that matters if you want to make the sale.
The second thing is most entrepreneurs don’t understand distribution. Every company is different and distribution means something different for every company but one of the questions I always ask is who’s your target customer specifically. Not the company but whom inside that company and who already has a sales force that’s calling on that particular person and have built a trusted relationship with. Can you burrow someone’s brand? Can you barrow someone’s sales force to sell your product?
There’s lots of different ways to cut it so I’ll give you a very concrete example. I mentioned SurePayroll, the first two or three years there we were selling directly and we were struggling – really struggling to make it work. Eventually, we got lucky and ended up doing a partnership with Wells Fargo.
It turns out that for small business accounts a checking account is just a checking account – it’s a commodity. And there’s a lot of churn – people go from one bank to another bank. Conversely, payroll is really sticky. If you’ve ever had a payroll, switching payroll sucks. Just sucks. So the bank wanted to offer a payroll service. Yes they made money in payroll but what they really cared about was customer retention.
I think the best sales people are problem solvers. They think about it from the point of view of the customer and they put the needs of the customer first. Those are entrepreneurs I like to back.
We won that RFP and we ended up signing a deal with Wells Fargo. They had 50 sales people nationwide and all they did was sell payroll services to their small business accounts. It turns out if you’re a small business owner and your banker picks up the phone and calls you, you answer the phone. Everyone answers the phone for the banker and they trust their bank. Our sales went through the roof.
And it was because we were using the banks. When we were selling directly we were cold calling people “Hey do you need a new payroll provider?” You put Wells Fargo in front of it, people pick up the phone. That’s just one example. Every business is different but I always look for the unfair advantage in customer acquisition.
Most entrepreneurs don’t think that way. They don’t understand and think they’ll put up a website and people will come to it. We like founders who really, deeply, truly understand customer acquisition. Again, every company’s different but there’s always some kind of unfair advantage that they have.
CF: Is there a trait that you can identify in entrepreneurs that signifies an ability to know the customer and sell?
MA: I have a saying that persistence without empathy is a mental illness. Most entrepreneurs, to succeed, have to have incredible persistence because everyone expects you to fail and most people say no. You just have to walk through walls.
But you also have to have empathy. I think the best sales people are problem solvers. They think about it from the point of view of the customer and they put the needs of the customer first. Those are entrepreneurs I like to back.
I don’t know if you realize how great the Ohio government is relative to the rest of the country. It’s very unique. Very few states out there have this level of support.
CF: What’s is enticing enough about Cincinnati that makes you come here?
MA: I’ve been here many times but this is my second visit for MATH Venture Partners. We’re a new venture fund and we started raising our fund in the spring of 2014. Just like entrepreneurs we have to go raise our money too. So we came here in the very beginning of that process.
It’s also a thriving ecosystem. What’s interesting to me about Cincinnati, as a model, is a combination of factors. You have industry, you have P&G and Kroger, Cincinnati Children’s and other large companies. You also have state money and other sources of capital starting to form. You have mentors, you have incubators and you have a concentration of domain expertise around ad tech and data and healthcare.
So you have domain expertise, you have access to large companies, you have capital, and you have universities. And they’re not all silo-ed – all those disparate organization and entities have come together. It’s really a model for the rest of the country in terms of how to create an ecosystem.
Also, I don’t know if you realize how great the Ohio government is relative to the rest of the country. It’s very unique. Very few states out there have this level of support. Now we’ll see if that translates into sustainable success because it’s early, early days. So, as a venture fund, we’re real interested in the model.
I’m also a big believer in community. Most entrepreneurs fail and I think it takes a community to improve the odds of success. I don’t think you can dramatically change the arc of most companies but you can improve the odds of success. So, I’m a big believer in that and I think you guys are doing a particularly good job of it.
I’m also a big believer in community. Most entrepreneurs fail and I think it takes a community to improve the odds of success.
CF: So how would you sell Cincinnati to a potential entrepreneur?
MA: I’ll tell you what all the selling points are and the one question I have.
Selling points are access to resources, access to capital, access to customers, access to mentors – the entire infrastructure of support. Cost of living, relative to Chicago or New York or Silicon Valley is big too. So all of that, the infrastructure and resources are great, the question I have is talent. At the end of the day, you live and die as entrepreneur by the teams you have.
The good news is you have some big corporations and they do a good job of hiring top people from around the country. But have they migrated from these corporations? This is a question and I don’t have the answer. Is there enough tech talent here, is there enough marketing talent?
I think the answer to your question for tech talent is that it’s going to have to be home grown and that might take some time.
And I’ll tell you where Illinois has failed, the state’s getting better, but the University of Illinois has a great computer science and engineering program. Most of the students graduate and, historically, have gone to Silicon Valley. We have this amazing talent pool and we never took advantage to it.
Now we’re working much closer with the universities in Chicago and really tying the universities in. We’re proactively going out to the universities and recruiting and them in their freshman and sophomore years. We are really making a hard fought campaign to keep our talent in the state because that’s the farm team, to use the baseball analogy, that’s where talent comes from. And it’s always better to build it internally than to go buy it.
CF: If you have to import it – go buy it, what kind of strategy should we take?
MA: I think the primary target is somebody who’s married, maybe has small kids and doesn’t want to raise the kids on either coast or in a really large city. Maybe money is tight and maybe the wife comes from the Midwest and wants to get back to the region but they also want to be close to an urban environment. I think that’s the sweet spot.