April 7, 2019

Where I'm Investing and 15 Marketplace Questions

I’ve been getting a lot of questions about what kind of companies I’m interested in investing in, so I thought it would be helpful to write that out here.

At Canvas Ventures, we generally invest anywhere from $5M up to $20M in Series A and Series B rounds. We will also get involved at the seed stage in special cases, often where there is an existing relationship with a founder or a market.

These are my focus areas:

  1. Marketplaces
  2. Consumer
  3. Software

My previous investments can also give you a sense of what I’m interested in.

Why do I like those types of companies?

  1. Marketplaces: these are businesses that connect supply and demand, and in my focus area through software, such as Uber, Lyft, and Airbnb. They have two-sided network effects that create defensibility once the company achieves scale. This makes a marketplace company more durable once it reaches a certain size. So much has been written about this that I don’t need to rehash it here, but here is my professor from business school 15 years ago that opened my eyes to two sided network effects, and here is a VC post on it. Another helpful data point is NFX’s research that 70% of the value created by tech companies since the Internet became widespread in 1994 has been from network effects businesses. Canvas has been fortunate to invest in many successful marketplaces, such as Transfix and Zola.
  2. Consumer: I’m particularly interested in useful consumer apps that might actually land a place on the first screen of your phone, even if they aren’t inherently social or viral at first. That’s what got me interested in Yelp, Strava, Superhuman, and others.
  3. Software (SaaS/Enterprise): as a computer science major, I will always love software of nearly all types. I try to focus on areas that are either connected to my work experience, my investment experience, or an interest area, such as these:
  • B2B marketplaces coupled with enterprise software (because I love marketplaces)
  • Software for local businesses or SMBs (based on Yelp experience)
  • Productivity software (such as Superhuman)
  • Software to help you scale or run sales, support, or other functions as you grow to 500 employees (such as Stripe, which helped us as we grew to that stage at Eat24)

This doesn’t mean I’m only looking at those types of companies. I’ve invested in everything from insurance companies (Metromile) to coffee shops (Philz Coffee) and legal startups (Atrium).

I do tend to take more meetings in the first three categories above, so if you have a company that falls in there, I want to hear about it. You can find me on twitter, and my DMs are open: @newmike

For marketplaces, I like to ask myself the questions below through the process of getting to know a marketplace. Of course, these won’t all get answered in a first meeting, but a few founders have found this checklist helpful:

Marketplace Checklist: 15 Questions

  1. Which side of the network values the other side more?
  2. Is there an effective and proprietary method for distribution to each side of the marketplace, especially the more highly valued side?
  3. How strong are cross-side network effects, is there a metric that can measure that, and how has it tracked over the last year?
  4. Are there same-side network effects, and how strong are they?
  5. What are switching costs for each side?
  6. What are LTV and CAC for demand and supply side?
  7. What does liquidity look like, and how do you measure it (e.g. average amount of time from supply being posted to fulfilled/met with demand)?
  8. What is frequency of use (transactions per month) for demand and supply side?
  9. What is average transaction size for demand and supply side?
  10. What is the marketplace take rate or monetization model, and what is the the sustainable take rate over time and why?
  11. Does it get easier to acquire incremental supply and incremental demand as this marketplace grows?
  12. How fragmented is supply side?
  13. Is there an initial focus on one or two geographies or categories, and how strong are the network effects there?
  14. What is the winning strategy for that initial market, and what is the plan to scale beyond that?
  15. Is there a new product enhancement to the marketplace/transactional user experience, such as Eat24 allowing more convenient food ordering from a mobile app vs. the old model of making phone calls and needing a paper menu?

Additional Marketplace Resources and Links:

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