What it means to be a founder-friendly investor with Jason Babcoke

Sumeru Managing Director Jason Babcoke, explains the art and science of product marketing, the value of brand advocates, and why a founder-friendly investor is more than just a passive investor.

Jason Babcoke:         
What makes a great founder in particular in software? I think it’s one and the same in that it’s the ability to be passionate and precise about product, but also being self-aware to know that you don’t have all the answers, especially when it comes to scaling and wanting to bring in to outside help and wanting to bring in different points of view.

Mark:  (00:00:30)                    
Hello, and welcome to Sumeru’s Scaling X,  the podcast. it’s all about growth. Here on Scaling X, we dig into life’s essential questions including this one. How do you scale a growth stage company without losing its soul. Today, we’re talking to Sumeru managing director, Jason Babcoke, who has an MBA from Harvard, a master’s in mechanical engineering from Stanford and a stellar reputation as a founder friendly investor. Jason, thanks for coming on to scaling X.

Jason Babcoke:        
Thanks for having me.

Mark:   (00:01:00)                     
Of course. Okay. So first question right off the bat, what do you actually do at Sumeru?

Jason Babcoke:         
Our specialization really is in looking for really strong product-led companies in interesting markets and then being an operational value add partner to help scale the company. Ultimately, what we’re looking to do is build a fantastic business on top of a stellar product. Together, that means a category winner and ultimately either taking these companies public or exiting to a strategic. And that’s kind of the investment process that we run and we’ve been doing it for a number of funds now.

Mark:   (00:01:30)                    
Everybody there at Sumeru is able to wear a lot of hats and to provide expertise on a number of different levels and areas. What’s the one that is really a specialty of yours?

Jason Babcoke:  (00:02:00)      
I’d say go-to-market. Go-to-market’s one of the most important things to get right after you get product-market fit nailed. And the reason that’s so important is it impacts just about everything in the company. And I don’t mean just sales. I mean sales, marketing, and customer success. So the whole process of acquiring customers, making them successful, retaining them, marketing to new customers, that’s a really art and science on top of fantastic product. And it’s also an important transition chapter in most companies’ lives, meaning a lot of companies we look at will achieve product-market fit, but if they don’t nail go-to-market, they may never reach their full potential. They may never grow up to be a public company, or they may never grow up to be a category leader.

Mark:    (00:02:30)                   
So you talked about art and science. Can you tell me how that plays out in that go-to-market strategy?

Jason Babcoke:   (00:03:00)      
So in go-to-market, there are certain KPIs that we’re probably mostly familiar with. Things around how much do you spend in terms of sales and marketing to grow X amount of revenue or annual recurring revenue. Beyond that, there are certain elements that you look at to judge the health of the customer base, like customer retention, KPIs, that’s pretty standard, right? And everybody knows if you’re in the industry, what metrics to pay attention to. The art and science really comes into, how do you creatively apply those to the particular product set and market that the company’s going after to make sure you’re actually meeting customer needs today, but also over the long term. And what I mean by art and science is there’s certainly lots of metrics we help instrument to a company that’s very, very specific to the product and market that they’re addressing.

(00:04:00) The art piece comes into how do you build the leadership? How do you get the right marketing message? How do you get the right engagement beyond just the basics with customers? And some of our most exciting companies (00:03:30) have relationships with their customers that go well beyond a simple ROI calculation, meaning customers really feel like they’re building their future careers by getting to know, and using the products that our companies sell. And so in essence, we’re transforming not only the corporation that we sell our products to, but also the users’ lives. They want to build their career by knowing how to use certain product stacks that our companies offer. And that kind of deep relationship is not formulaic, right? You have to have a right leadership within the company. They have to engage with customers the right way. You have to have the right personalities, the right deep, emotional connection between customers and companies. And this is how really transformational companies get built.

Mark:                       
So what you’re saying is B2B software involves actually a deep trusting relationship.

Jason Babcoke:     (00:04:30)     
Yeah. I think that’s the ultimate goal, right? I think companies that don’t think that way potentially are leaving a lot of opportunity on the table. Said differently, what we really want is we want customers, meaning end users within the companies that our companies go after, to really identify with the software that we’re providing. And that’s important because we want them to be champions within our customers. But if they ever switch companies for whatever reason, we want them to, as soon as they land at their next company, to insist that our products are being used. And in fact, this is what we look for when we’re diligencing product, we will actually look for customer references that say things like, “I will never do accounting the old way.

(00:05:00) I will only do accounting using BlackLine, one of our previous portfolio companies.”

(00:05:30) That kind of transformational statement not only says that this product is fantastic, it says that I have a deep connection to the company and I trust the company because I’m trusting my career, my future career opportunities based on the expertise I’m developing by being an expert user of something like BlackLine as an example. So it’s that kind of deep connection with individual users that’s really powerful. How you get it is certainly by having strong product, but going the extra mile and actually making sure that you align with those individual users. And some of our best companies have really fantastic user conferences that allows customers from lots of different companies to come together, make their own connections, build a community around the product. And it’s these things that allow you to extend beyond the basics of a product into that deeper relationship.

Mark:   (00:06:00)                    
I didn’t expect that to be a consideration now that you’re thinking about it, but it’s true that if a product is good enough, the users of that product will become advocates of it when they move from job to job. And that’s a sign that, I mean, that must tell you something as an investor.

Jason Babcoke:   (00:06:3)     
Absolutely. Yeah. That is probably one of the most important, and I like how you’ve articulated it, being an advocate. That signal for us is one of the most important things to build a fantastic company on. And it’s often times what we look for in our investments, meaning we will prefer to go invest in a company that has strong advocacy, but be smaller and less commercially known than someone who might be bigger in terms of revenue, but doesn’t have the customer advocacy. Why? Because advocacy speaks to the future or fate of the company and the future or fate of the product stack. And so advocacy is one of the hardest things to build. It takes all those elements that we’ve been discussing around product and engagement with customers. And again, I like how you’ve articulated it, meaning advocacy is probably one of the most important signals to judge product strength and company and user relationships.

Mark:     (00:07:00)                 
And advocacy makes marketing easy because you have the users of the product are actually fans and are out there talking about it, posting about it, training other people in how to use it. So that does a lot of the work for you in the marketing front.

Jason Babcoke:   (00:07:30)      
Yeah, 100%. In fact, some of the marketing and campaigns and strategies that our customers will run is based on advocacy. So for instance, a small example is one of our companies early on needed to drive awareness. Mainly customers weren’t aware of the class of software even existing. It was a brand new type of way to do a business process. Instead of running a top down marketing campaign, we created a band tour. So every city, we would host mini dinners with two or three customers, 15 to 20 prospects, and it was just the customers talking about their experience using the product with the people at the dinner. And that proved to be one of the number one ways to drive awareness, but also drive conversion because you’re depending just like you’ve said, on advocacy, letting customers speak on their own (00:08:00) behalf around the power and transformation that they’ve experienced in their own careers and their own operations to other peers. And so that’s one of the things we look for and one of the things we also leverage to help scale companies.

Mark:   (00:08:30)                  
So in a lot of cases, when Sumeru is looking to invest in a company, they’re not just looking at the product, they’re also looking very closely at the founder. You’ve been doing this for a long time. You’ve met a lot of founders that Sumeru has invested in and worked with founders that you haven’t worked with. What do they have in common?

Jason Babcoke:         
Yeah. This is a really important topic. And I like how you’ve presented it as a connection to  product because ultimately that’s what we are looking for and we think is very special about founders. Founders, more than any other executive, experienced or not, have a very special role and connection, I think in two or three areas. First, is they’re often times the heart and the soul of the company. And so we look for that in terms of setting cultures, setting an employment environment (00:09:00) and an opportunity set to help recruit new and exciting members to the team because a growth company really requires fundamentally on recruiting fantastic people, people that want to join, want to build their company alongside the founder, who has their own mission about building a really exciting scale company. So that’s category one, is understanding the cultural elements that the founder has created and how that impacts and benefits growth.

The other that’s, I would say equally important if not more so is founders will (00:09:30) have a deeper connection oftentimes to customer pain and solving that with product. Why? Because that’s oftentimes how they started the company. Some of our most impactful founders started because they understood the problem in the first place. They often times experienced the problem and they may have experienced it so acutely that they said, “You know what? I’m going to grow a company around this. I’m going to solve this. I’m so upset or I’m so excited, either decided coin works, but I’m so energized by this problem (00:10:00) and an ability to solve it, I’m going to build a company. And if I’m crazy enough to pull that off and build a great product, well, hey, maybe I can even build an exciting transformational experience for all kinds of people.”

Mark:                       
Is there a correlation between pain and success as a founder?

Jason Babcoke:    (00:10:30)   
100%. I think some of our best experience pain in a few steps, for lack of a better term. First, it’s the experience of understanding acutely the pain of this problem that they’re solving in the first place, right? That’s what gives them the north star on what’s important about product. Because a lot of people can, for instance, understand, “Hey, let’s build a modern property management accounting solution,” right? Or build a modern accounting solution for general corporate accounting. These are all classes of software that we invest in. What’s more important though, is understanding exactly what feature function needs to be delivered first, what’s important. And so having direct experience and calibrating against that, and what is important versus not is where great products get made or broken, right?

(00:11:00) And so this is what really separates, we think leading products from okay products is back to the founder’s connection to the customer and the solution set and always being a good guiding point, a north star for how product prioritization should be done, right? What feature functions do we want to put in? What are okay? What are actually detractors, right? Nobody wants everything in a product because then your usability goes south. So there’s always a prioritization of what’s important. So that’s one of the things we look for in terms of north [00:11:30] star about that connectivity for sure.

Mark:                       
We’re talking about founders in general. Do they have a personality trait that you see time and time again, and either see as a strength or a liability?

Jason Babcoke:   (00:12:00)      
Yeah, that’s a great question. And I’ll weave back to your previous question too, about expanding the topic of have you experienced pain along the way? Because the other pain point that is really, I think makes fantastic founders is actually having experienced a few setbacks as they’re building a company, right? Because oftentimes we start off, and it’s natural, we start off saying, “Hey, I have the solution. It’s on paper. I just need to go build it and customers will come.” And oftentimes, that works in the first chapter. And then the company scales to a point where all of a sudden everything else matters. Sales matters, marketing matters, customer success matters, recruiting matters, HR matters and so there’s all these things that are well beyond the core focus on product that are critical to scaling a company, but may or may not have been experienced or had any exposure to in (00:12:30) terms of a founder. Right?

So when you say what makes a great founder, or what makes a great founder in particular in software? I think it’s one and the same in that it’s the ability to be passionate and precise about product, but also being self aware to know that you don’t have all the answers, especially when it comes to scaling and wanting to bring in outside help and wanting to bring in different points of view. So it’s almost this balancing act of maintaining precision and aggressiveness on product-market fit and staying focused on that, [00:13:00] but also being flexible in other parts of the organization to bring in talent that has done that type of work many times before. Done right, this is where you get the turbocharging effect, where you’ve got a great product-market fit, you bring in expertise that can help with scaling and go-to-market in particular, and a founder that really scales into a fantastic CEO, learns how to be flexible and adaptable and actually change their own role.

They frankly have to give up some of the control on product while still (00:13:30) maintaining the product vision for the company. And they have to also start to manage some of these other disciplines that they’re not experts in. So they’re almost going out to scale a company to hire somebody that’s vastly more experienced in sales and marketing as an example than they are. Yet that person now reports to them, and this is not only a founder that might be a great product person, but it’s maybe their first time as a CEO. So they may never even had these kind of roles and response responsibilities to manage. And again, so the best founders and I think (00:14:00) it’s particularly true in software have to be very self aware and be very adaptive about bringing that expertise.

And I think the reason it’s in particular different within software is growth happens so fast and competition is so fierce. So there’s not time to get it wrong, right? A year going by in a software company, may be like four or five years going by in a non-software company in terms of the opportunity gained or the opportunity lost if you’re not executing in all these dimensions at the same time.

Mark:    (00:14:30)
And so is it a matter of a founder having the commitment to their vision and their fierce defenders of their product and of their initial vision and yet they have to be flexible enough to see it change and accept possibly superior ideas, even from the people that work from them.

Jason Babcoke:   (00:15:00)       
I think that’s very well said, much more succinct than I was. But I think what you’ve said is north star on product and end game, flexibility on the road to get there. And I think those two together make a fantastic and powerful founder that will continue to scale.

Mark:   (00:15:30)                  
Well, it’s interesting you’re talking about that stage because that’s where Sumeru typically partners and invests in and partners with a company, right? At that sort of, they’ve already proven a viability for their product, but that’s also a time when a founder can sometimes step back and a new CEO can… That’s where that transition would take place,  right?

Jason Babcoke:   (00:16:00)       
It is. And you’ve touched upon a couple things there. Yes, we invest once we determine product-market fit is proven. By coincidence, that usually happens somewhere between 10 and 30 million of revenue. Depends on the market, depends on the product. And you’re also right that, that is where the game really changes for the company. Because in the first chapter, it was all around product-market fit, doing initial go-to-market, kind of the basics on the business side. Then going from either 10 to 20 to 30, up to four or five times that over a commensurate time period requires you to build out a lot of capability that didn’t exist in the company. And that’s a very important transitionary period. Our solution set to that, and the reason we specialize in this is we’ve become pretty adept at enabling great product founders to make that transition by building fantastic operational capabilities and helping recruiting team members that can help them build out these capabilities.

And so we act as an enabler to help ensure that transition happens. At the same time, we also support founders that (00:16:30) may want to take a step back over time. And we had great success in both paths, meaning founders that want to continue to scale all the way through IPO and beyond or founders that after a year and a half, two years of our investment say, “Hey, great. The company is now on great footing. We have a great head of sales, marketing, customer success. I could see the business operation’s really performing well. I’d like to go back and focus on product, or I’d like to be a strategic advisor and chairman of the board at a company.” And we’ve supported both of those paths, but it does require a (00:17:00) different kind of investment partner and a hands-on yet enabling approach. And we think we’ve struck that balance quite well, based on our track record of doing this.

Mark:                       
What does that kind of investment in that kind of partnership look like? Because I know that sometimes investors are passive and I know that you’re very active in the growth capital realm.

Jason Babcoke:    (00:17:30)    
Yeah. It’s a great question and we get this a lot, meaning, “Hey, isn’t the true definition of founder friendly being passive? Whatever the founder wants to do, have  at it, call me when you need more funding.” We would argue no, because we would argue the true founder-friendly and maybe a better term is founder-enabled or founder-supportive is having an active partner to help ensure success. And so we’re not only doing this because we think it’s the right thing to do. We’re doing this because we have a true vested interest. So when we make an investment, what’s very typical for us is a company has fantastic product, fantastic market, reputation and customer references (00:18:0)  like we spoke about before, meaning customers that are truly advocates. So those are the pillars of strength. Inside the company, it’s usually one to three founders that have grown the product based on their own personal pain and experience. And they’ve done quite well.

But they also see over the horizon a whole new set of challenges. And when that realization happens, that’s the perfect time for us to step in because we can help be a solution set against those challenges. And what I mean by that is, a company (00:18:30) at, let’s say 20 million of ARR will be operating much different than a company at 100 million. And in software, you can’t wait till you’re 100 million to solve those problems, because otherwise you’ll never get there. You’ll never actually get to 100 million of revenue. Instead, what you need to do at that 20 million stage is you need to start building all business processes, doing aggressive recruiting on people that have scaled companies before. This goes all the way down to kind of different C-suite folks, but also mid-level managers, (00:19:00) frontline sales people, key engineers.

And it touches upon everything from sales, marketing, even architecture, the ability to support four or five times as many customers as you are today without the product falling over. These are all building blocks you have to do well in advance of when you actually need them. And so our approach is to, and we do this as part of the relationship building, is we will not only due diligence on a company, but we actually package up all of the findings during that diligence period and play it back to management and founders and [00:19:30] say, “Hey, here’s your fantastic pillars. Again, product, product DNA in the company, founding team, that’s very strong. Here’s the blueprint that’s specific to your company, specific to your data that suggests what are the big building blocks we need to build.”

So the specifics are always different, but they often include things that we talked about, sales, marketing, product, customer success. That allows us to be very aligned out of the gate and get right to work and working really on a day to day basis, really (00:20:00) as an enabling kind of co-founding team, if you will, to the original founders. But we do draw the line. We’re not company operators. So founders of management teams drive the decision. They own the outcome. They are running the company, but we are a resource essentially on demand to tackle anything and everything with high intensity and high cadence. If we do it right, and we have a very good track record doing this, fast forward three years, the company will be very different in terms of operations. (00:20:30) It’ll be significantly scaled, significantly well run, KPIs improve in terms of operational things like customer retention and upsell.

And the overall experience of people working in the company, and we often get this as feedback is founders will say, “Look, this was a high intensity three-year experience, but I am a different CEO than I was three years ago. I now can lead the company for the next four or five chapters. And I didn’t know what I didn’t know, but thank God I picked the right partner because now (00:21:00) I am a scaled CEO. They’ve given me a crash course in what it means to build and run a scale company, and I didn’t have to make the mistakes and except for the consequences by doing it on my own.”

Mark:                       
Words of wisdom from Sumeru’s Jason Babcoke. After all, scaling a company is a team sport. Jason, thanks for sharing your wisdom and your time today.

Jason Babcoke:    (00:21:30)     
Yeah, Mark, I really appreciate you taking the time today. I think you’ve really articulated well what we look to do, and that’s really partner with founders that are driving transformational experiences with our customers through product. And taking that together with our operational capabilities is what we really enjoy and love to do. We call ourselves investors, but quite frankly, we spend most of our time working with founders on helping build companies. And that’s the thing that I really enjoy personally. So I appreciate you taking the time to uncover some of the elements of why that’s important. And if anybody’s listening to this and is interested in what Sumeru has to offer, whether it’s an investment or just advice, we’re happy (00:22:00) to talk to you. We always love meeting founders and learning a great product stories.

Mark:                       
Great. Thank you very much. Appreciate it, Jason. This has been Scaling X.