Al Lalani, Co-Founder of Annex Cloud talks with Pat Eggen, Co-Founder & Partner Counterpart Ventures about how VC’s are thinking about their investments during this current economy. Plus, tips for startups seeking new capital.
Welcome to another series of Annex Cloud Market Movers, where we bring together videos with market luminaries, with experts, industry experts, and venture capitalists.
Today, I want to welcome Patrick Eggen. He is the co-founder of Counterpart Ventures. He's an early investor in Zoom, in Ring, and full disclosure, he's also an investor in Annex Cloud. Welcome to Annex Cloud Market Movers, Patrick.
Thanks Al, thrilled to be here.
I want to start off with a broad question as you look at the venture capital industry and a lot has changed in the last six to eight weeks as we've navigated into a very different stream as we go along. What advice would you give or what do you foresee and what do you see happening that hasn't already happened in the last six weeks or eight weeks and then what do you foresee happening in the next short and middle longterm with venture capital as general industry and in investments as a whole?
Yeah, Al. Wonderful question. Obviously, the last six to eight weeks have been a turbulent and a different time. I think we all thought a correction was inevitable at some point. We've been at this ten-year bull run, which has been a wonderful run, but I think it had to end. We just didn't think it would be a pandemic that would be the trigger or catalyst. From a venture perspective, look, I think the party line throughout the industry is everyone's open for business. I think there's some nonsense to that statement. I think folks are open for business, but one we are in defense mode of our portfolios, triaging, ensuring that all these portfolio companies have sufficient runway to make it through a possible nuclear winter.
You also have to be focused on their core business and ensure that not only do they survive, but they sustain and they prosper. So when we get back to some degree of normalcy, we can anticipate some nice growth. But from a venture arm, we are still active in doing new deals, but I think a big asterisk is many of these deals we're in the process before the first week of March. I think Counterpart Ventures, which I'm a founding member and general partner and early proud investor of Annex Cloud, I think we had some contingency plans in place. We have a lot of exposure to Asia and we saw coronavirus come in the early days. So we thought about plan B and plan C in terms of deploying capital. I think we'll dial back our pace in Q2, April coincidentally will be probably our most active month in the existence of the fund. I think a lot of those deals were obviously in place before March. So there's a bit of an asterisk next to that.
That being said, I hope we're much more active in the second half of the year, but I think what's different about prior downturns, which I've been through too, is that we just don't know. We just don't know the full extent and implications of this epidemic. Whereas before, we had a significant correction in 2001 based on frothy valuations. Obviously, a significant credit crisis in '08, but we had a swift recovery. Now it's just, we don't know. And that's challenging from an investment perspective because it's common nature to defer activity. If it's a perceived deflationary environment, we want to defer investments because we think we can probably get in at cheaper prices later in the year. I don't think anyone's a winner in that environment. So right now we are active. We are being aggressive, but I think we're being very cautious because of the unknown.
And I guess the next logical question that comes to me personally is, and I know it's very, very difficult to predict this, but as businesses that were in flight that had not raised potentially, that may be looking to raise in the short term or the long term, if they have to put their plans on hold, how long should they be thinking about? You said maybe later half the year, you'll start to think about that again. But realistically we've seen in 2001, 2008, when any kind of crisis happens or downturn happens, it's usually a much longer cycle and the correction takes a little bit longer than we all think it will. Again, we don't have a crystal ball, but if you had a perspective, are we saying 2020 is broadly shot? Are we saying 20, 21 is what people should look to if they are trying to rebuild? How do you look at it?
Let me take a different spin on that. As an operator, Al, I encourage all venture-backed operators or CEOs that, prerequisite, if possible at this point, is to have at least 18 months of runway, ideally 24 months. Obviously that's not possible with all portfolio companies. I think those that are South of 12 months are in a tough position because I think getting access to new sources of capital, external investors will be very, very challenging for the next three, if not six, if not nine months. So you are dependent upon your insiders to inject more capital. Or you can be much more preemptive and structure capital or runway out to 18, 24 months. And again, that's not easy, but I think that's first and foremost, something that you have to be preemptive, you have to stretch that cash out as long as possible. And then when the markets start to come back, I think you're going to have to be much more receptive and open to much more rational valuations.
Again, I think we had an incredible run for almost a decade now and obviously founders had a lot more leverage. Right now it's much more about survival mode and getting through this nuclear winter. We don't know when it's going to end. So just having that runway and that requires hard choices, hard choices in terms of focus, hard choices in terms of making cuts and hard choices in terms of what you want to focus on in terms of day to day operations.
Patrick, this is great. And I think you're being very, very direct which is very wonderful for everyone that's listening. As we all started thinking about this, and the first thing you mentioned is, is you started focusing back on your portfolio companies, and that was your first focus is to make sure they're safe. We as CEOs started focusing on our existing customers and we said, "The first focus is to retain your existing customers. Make sure they stay in business, make sure they're excited, make sure they get the continual value from there." Our customers, which can be either B2B or B2C, we've had several conversations and they're doing the same exact thing, which is retention or requiring their existing customers is again a priority.
So I have two questions from there. As you think about retention and loyalty, what is your perspective on a focus on that in the short and long term? That's one. And secondly, the venture industry has always been about growth, growth, growth. Grow it at all costs. That's all awesome. Is it moving, at least in the nearer term, more towards profitability, more towards sustainability as opposed to just growth only at all costs? How do you look at those two things?
Al, look to bring it back. Look, obviously 2020 has played out much differently than we all anticipated. Let's take it from the perspective of some of your customers. Brands, retailers, they've had to adapt to this "new normal." Many new variables, supply chain disruptions, non-critical retail shutdowns, critical stores being open, but with limited experience, a real flocking to online, so you have to be flexible when we start to reopen again. But more than ever, as you mentioned, just be wary of customer needs. You have to be utterly obsessed and maniacal there. So you might be only serving them in a much more limited capacity now, but I think more than ever, retention is so critical.
This might be a good segue to growth at all costs, historically customer acquisition, et cetera, has been a real focus of a lot of venture-backed companies. But as budgets are trimmed and discretionary spending is largely on hold for a lot of consumers and organizations or enterprise, I think much of the focus shifts away from traditional customer acquisition to retention, retention of your core loyal customers. You have to take care of those relationships, cultivate them, get really creative and scrappy in the way you interact with your customers. Some of the stuff that Annex Cloud is doing, getting testimonials, organizing webinars with your customers and partners.
But I think it's important that your customer relationships out the last coronavirus. And in that lens, I think it's really important that you humanize the way you do business and you understand the dire situation and communicate that to your customer base. Constant communication is so key. There are new standards, there are changes, getting ahead of that, whether that's about doing business in a different way, or as we start to open up.
And finally your values should remain the same and steadfast and consistent. Nothing changes in that aspect, but it's so important to adapt and deliver value in these times. And I think a lot of that value is focus on your core customer base, retaining them, as opposed to growth at all costs, which has been the mantra of a lot of VC backed companies over the past decade of just throwing money at customers. I think now retention, customer success, are just critical.
Absolutely. And these are amazing words. One of the things I like to say is, in addition to that retention aspect, we have to figure out how we can build during this tough time or how we can engender during this tough time, attitudinal loyalty from our customers. When we look at loyalty in those terms, you've got behavioral loyalty. Everyone's got behavioral loyalty towards United Airlines, but no one has told me that they love their airline or whatever their favorite airline is. But attitudinal loyalty is where you can have those customers do something for you that they would not normally do otherwise. I have a feeling that even though consumer spending is down, products that build that attitudinal loyalty will still get bought.
We also have a feeling here that you can essentially engineer that through a process. Obviously you have to have a great product, no question about that. And you have to have great service. But that whole process for engineering a true retention campaign or loyalty with those customers has to be talked through from the beginning of their experience with your brand to the end. And it's not just about your product and it's not just about the service, but it's about a lot more things along the way. Patrick, these are-
Just to jump in. Look at a company like Costco. They've really evolved through this whole process. They've had to adapt, regulating traffic, no quintessential samples, senior hours. They've really elevated theirs in house brand of signature. They kept their value, cost-conscious yet quality, not compromising on that, bulk and concentrated selection of goods, and then utterly obsessed with customer service. Not a venture-backed company, at one point was, but as they evolve, they thrive and actually augment her game when it's tough and they become a community focal point. So again, that's probably the gold standard at this point, but then again, I think all venture-backed companies, whether it's being scrappy or creative, at the end of the day, sustain their values and ensuring that they retain their core customers. So once we make it through this nuclear winter, they're going to come out stronger.
And one thing I will add is, for a lot of brands, this is actually working out as a positive, which is they're getting a little bit of a corona boost, so to speak. One of the examples I was giving out to others was, Campbell Soup has a distribution problem. There's a lot of other companies that were selling soup now are being tried by people. And they may just be trying it out of necessity, but will you be able to retain them when things get a little bit back to normalcy where the distribution channel is now fixed and Campbell Soup's now able to deliver the product that it was before.
So if you are able to get in touch with that end customer and retain them, and if this is working well for you, it's even more important to retain them, because if you change your distribution process and are now able to create much more product because of this boost for you, but people don't remember you after this, because they only bought out of necessity, but did not really create a true connection and loyalty with your brand, your spike will go down just like it came back up. That's another perspective to look at as well. Patrick thank you for-
There's truly a jump ball situation. We spent a lot of time talking about retention, but Campbell Soups and other CPG skews in grocery stores if they're out of stock, customers or consumers are trying other competitors or emerging brands, and now they have an opportunity to steal share away. That is more of a, I guess, a situation driven stealing share. But if they're able to develop that relationship and retain that customer, you can also be very aggressive and preemptive at this time as well. It's just not about retention.
Fantastic. Patrick, for taking the time with us today, we really appreciate all the insight you've given us. For everyone else, please continue following us. You can go to annexcloud.com/marketmovers to see all the latest and greatest videos and series that we're putting together with market luminaries like Patrick. Patrick, thank you again.
Thank you Al. Appreciate it.
Bye for now.
Co-Founder, Annex Cloud
Co-Founder & Partner, Counterpart Ventures
Since 2010, Annex Cloud has provided industry leading loyalty solutions to more than 250 leading brands and retailers, including Jenni Kayne, Hewlett-Packard, Bed Bath & Beyond, e.l.f. Cosmetics, Olympus, Sugarfina, Mizuno, MacKenzie-Childs, VF Corp., with the ability to engage tens of millions of their customers one-to-one at scale.
The Annex Cloud platform provides fully integrated Customer Loyalty, Referral Marketing, and User Generated Content (UGC) solutions that seamlessly work together to optimize the customer journey and deliver a unified customer experience that is designed to accelerate revenue growth, retain valuable customers, increase average order values (AOV) and drive repeat order frequency.
Counterpart is a SF-based lifecycle venture fund, embracing an innovative and flexible model which creatively aligns with the needs of our portfolio companies. We invest $2M-$6M in B2B SaaS, mobility and marketplace technologies which target nontrivial problems or fill missing gaps in large markets. We help build companies by providing meaningful access to real customers and strategic partnerships. We are obsessed with brokering meaningful customer introductions to our portfolio companies. Our Counter Club represents the most active and engaged network of CVCs among any traditional VC firm.
Today’s VC landscape is increasingly divided by micro and mega funds. Counterpart Ventures is uniquely positioned to price and lead rounds where others cannot or simply will not. We don’t require social proof by blindly following other investors, when we have conviction we are all in. We recently had a first close of Counterpart Fund II ($100M) and now actively investing from that fund.
To learn more about Counterpart Ventures, visit www.counterpart.vc