William Leonard
Hey everyone, welcome back to the Atlanta Startup Podcast. My name is William Leonard, your host for today. And I’m excited to be sitting down with Nicole Bentz, who is a VC at S3 Ventures. Nicole, welcome to the podcast.
Nicole Bentz
Hi, thank you so much for having me.
William Leonard
Yeah, I’m excited to talk more about your background in S3. And you know what, we’ll start with S3, right? Because it is a pretty storied firm out of Texas. Single LP structure, S3 you’re a, S3 over 900 million now. And you’ve got a plethora of great investments and exits in the portfolio. So maybe you can cure, it gets off and tell us more about the broader S3 thesis and how the firm thinks about executing its investment strategy.
Nicole Bentz
Yeah, definitely. It’s S3, we’ve been investing for the past 18 years. Now a whole team is based in Austin. As you mentioned, we’ve got a little over 908 and AUM or semifinal which is a 10 or $15 million fund that we kicked off last year. And as you said, we’re primarily focused on Texas-based companies. Always have been since the beginning opportunistic investing in the middle of the country. So basically, not San Francisco, but generally speaking, like in our backyard. We are mostly investing in B2B software businesses, we are, S3 industry agnostic, as a as a firm, but primarily investing in B2B software, and then a little bit of medical device, some digital experience, consumer, that sort of thing. And so it’s a we’re early stage, we’ll do CD series B investments, initial checks, start anywhere between one to 10 million. But as you said, we like to stay on for hopefully, about the life of the journey. So we allocate 20 million of capital per company, over the life of the investment. And a lot of that is aided also by our LP structure, as you mentioned, so we have a single LP, which is a massive luxury for us, but really, ultimately means two things for our founders. Number one, it frees up our time. So guys, the S3 part of our thesis is, and kind of our value add as a firm is we like to get really in-depth our portfolio company. So we like to roll up our sleeves, get our hands dirty, and hope and help our CEOs scale business. Secondly, it gives us a lot of flexibility, and actually how we allocate capital. And what I mean by that is we can flex up our funds over time. We frankly kind of never run into reserve constraints. And so we can be patient capital for our founders and back that up. So that’s kind of how we differentiate ourselves. And a little bit more about, I guess, our thesis, rice,
William Leonard
and, S3 C to Series B, one to 10 in dollar checks, and mentioned that the team is primarily based in Austin, and itself Dallas. Everyone’s in Austin. Right. And I think that’s so fascinating, because, S3 you’re leveraging this geography to win these deals like what, why focus on Texas deals and middle of the country. Right, S3 your position in the bay, Boston, New York, which I think there’s a lot of conversations as to why you wouldn’t want to be positioned there. But, S3 tells me more about how you all are leveraging, being in Texas, in Austin to win those hybrid competitive deals that are maybe the middle of the country, and even in Texas as well.
Nicole Bentz
I’ll say very quickly, S3 people ask us why Texas, I’d say the entire team and ESRI as a firm, we are incredibly bullish on Texas as a whole. We think it’s poised to be the third-largest venture market by 2030. So there’s increasingly I mean, there’s a lot of domain expertise here in Texas, S3 major industry leaders, a lot of reasons why Texas has become and I think will continue to become such a hub for innovation and for emerging startups. You know, with the team based here in Texas, and focusing on primarily Texas and then kind of middle country. I think that the benefit and why we do have that geo focus is, S3 twofold. Number one, I think it does help especially at the early stage to truly kind of be boots on the ground in the ecosystem. It’s a massive advantage for us in terms of our teams here in Austin. Many of us have lived in Austin for 20 plus years, or close to 20 years. So our entire network is here, both professionally and personally. And that means from deal sourcing to a lot of our successful founders are here as well. And that’s often where you get the best referrals right from from other founders founders are usually the hardest on on other founders in terms of assessing if they got it. But back to kind of, S3 why it matters that we are here locally investing out of our backyard, it also means that our S3 we can provide that assistance, like, in person, you can, it’s hard to do zoom is wonderful, but it’s really hard to do, like, S3 Zoom whiteboarding sessions with an early stage company, when you’re going through, hey, S3 we need a map out, we’re trying to reassess like our ICP, right? Let’s, let’s have a working session. So much better to do that in person. And additionally, I think we try to provide as much kind of, S3 assistance post-investment as we can, we try to get in-depth with our portfolio companies. So to the extent that we can also open up our network, to portfolio companies, and founders, introducing them to potential customers, potential future hires down the road, that sort of thing. So a lot of benefits in being here as a whole team, and also focusing on Texas and all the country.
William Leonard
Yeah, I think we adopt some of that similar framework and theme, valor being a hyper-regional focus firm, especially at their stage, like you mentioned, oftentimes, it’s so much better to go down the street and meet with the founder for coffee. He’s having to get on Zoom and do a two-hour strategy session. So I think you get that, that personalization, and just better relationship building that I think percent, as S3 throughout the company, and how it grows and progresses, as a startup. So I can certainly resonate.
Nicole Bentz
I couldn’t agree more. And I think that’s, S3 across the ecosystem to not only with the, S3 the founder relationship. These are like tenure relationships, that you’re truly weighing on both sides, both as the investor and then as founder, and CEO, and you want to make sure you like that person. And even when you disagree with them that you can still get, you can still work with them at the end of the day. Yep. And then I think across the board, S3 like, we’ve co-invest with Valor, really appreciate the work that you guys do. It’s great to also have that network. You’re regionally across other investors, other investors, and other firms as well. So a lot of benefits, I think, to being kind of hyper-focused on a certain region or geo. Yeah,
William Leonard
yeah, I agree. And shout out to RBO for the deal that we share. Yes, yeah. Shout out to Doug in the team out in Raleigh Durham. Yeah. And, Nicole, you’ve been in the realm of VC for some time. Now. You know, you started out at PWC. How did you really make that foray into venture? And why did you make that move?
Nicole Bentz
Yeah, yeah. So backing up on the Y first, I went to KU for college. And initially thought I was, it’s a long story to make it short, I thought I was going to do pre-med. And basically, after organic chemistry figured out, Hey, that’s not my calling. And they’re kind of bounced around, figured out, I wanted to do business. And my mom’s an accountant, she was like, hey, to try that out, ended up liking it as a major, but soon realized I never actually wanted to pursue that professionally. But kind of looking back, one of the best things I did, was because I had spent two years bouncing around majors. And so I was a junior, but nothing transferred over Credit Wise. And I was like, I need to get involved. This is to stand out. And so I ended up getting involved with the the business school’s student governing body effectively it was TA for a couple of classes and then got to know the director of entrepreneurship. And so that was really what opened my eyes to startups and venture capital. He’s an angel investor as well. And he had a class basically where he used students as effectively free consultants. Right. And so I remember basically being in a meeting with one company that he was advising and have invested in and I just loved the conversation and talks we were discussing the problems that they were basing. And I was like, How do I do this? Like, as an actual job. But I was, S3 as a county major, I went to KU, which I don’t think any VC firm, most VC firms don’t know where that is. Don’t know what school that is. And so I was like, How do I get there? So I ended up, S3 going through during the masters of accounting and PwC ended up like never actually using my accounting degree. But stay close to the startup community where I was in Kansas City at the time. And just had an opportunity to join a local students series, a firm called Flyover Capital. So jumped at that, and learned a ton. It was a small team at the time I joined, and I was squarely the most junior member, and probably touched and did a lot of things that I had no business touching at the time, but it was an incredible learning experience. Love the team there. At that point, kind of this was now S3 2012, I guess, yeah, 2020. And a chance to join S3 in the, I guess, at the end of 2020. there and I loved Austin, love the Texas ecosystem. And so that was what kind of brought me to S3 eventually. But yes, I think a mixture of luck in a lot of ways. But also, S3 building out that network and just staying close to the startup ecosystem. Where I was at is what got me into venture.
William Leonard
Yeah, I think our stories are very, very similar in that, in S3 you you get this experience working in undergrad with some startups. I was working with lead companies at my age. And I was like, Man, this is awesome. I want to do this full-time. I was like a Swiss army knife. Yeah. Well,
Nicole Bentz
this is a lot more fun than what people are describing the job would be like, at the career fair after college. I want to do that.
William Leonard
Exactly. And, I think it’s always interesting to understand someone’s path into venture, there’s no formula to getting into VC. I’ve seen people come in psychology, backgrounds, chemistry, backgrounds, engineering, fine. It’s whatever it may be. So it’s always fascinating. Understanding how you break into an industry that is so difficult to break into historically. But in thinking about your time in VC now, right, you spent some time at flyover capital, you’re coming up on three years with S3, and you’ve looked at hundreds, maybe even 1000s of deals, and you probably had to say no to most of those deals, right. That’s just the nature of the game of being a VC but curious. Yeah, exactly. You can’t do them all. curious to get your take on some of the frameworks for startup diligence, at the early seed series, a stage that you’ve developed in refined over your time of being an investor.
Nicole Bentz
Yeah. Um, yeah, I think, it differs by stage. The frameworks that you apply at a C at A and B Company, are not the same framework they are applying when you’re evaluating a C Company. So, S3 if I’m looking at a C Company, I think it’s an I should say, S3, we primarily, I mean, we invest post product post revenue, right? So it’s not seed, or precede, like the idea on the back of a napkin. It’s you’ve got customers, they’re paying you might be small dollars are not what they should be paying you eventually, but they’re at least paying you right. So the questions in my mind at that point, and when I’m evaluating a company, are centered around whether are they showing signs of early product market fit. So like, do they have paying customers? Are those customers using the product getting benefits out of it, that sort of thing? And primarily after that, S3 the majority of our diligence is focused on the team in the market. When it’s that early team, I’m thinking of questions. And this is kind of how S3 it’s not formal, but I think I frame a lot of my diligence and ask myself a series of questions, questions like, hey, is this a team that I think can grow the company? Importantly, is this team that can sell the product, especially since we primarily invest in the right B2B software, oftentimes, enterprise software, it’s going to be founder-led sales for quite a while. So I think I tend to invest and have, S3 have a preference for founders who can who can sell. The other thing that I think is important at the seed stage in particular is figuring out if there’s a founder or CEO market fit here. Do they have some sort of unique insight or experience that gives them almost an M Fair advantage in building this particular business at this point, right? And then we kind of alluded to this already, but one of the last questions on a team is, S3 do I want to it? It shouldn’t be in this order, right? Hopefully, you’re figuring it out sooner rather than later. But is this team that I want to work with potentially 10-plus years? Are they coachable? Are they someone? Is is this team that I also think could go recruit and hire like eight-plus players? Right? Well, others around the table say, hey, I want to go join them. And then on the market, S3 some of this is simple, right? Like, is this a venture-backed bull market, building through a bottoms-up market sizing approach, but then outside of that, figuring out if there’s some sort of unique structure or dynamic at play? There’s, there’s a million reasons why businesses fail, one of them is and probably the hardest one is timing. Right? You could do all the right things have the right team, the right product, right approach. But if you’re missing the timing element, then it’s all for nothing. So what’s unique about this, this time in the market, whether that be some sort of, S3 deletion, or key technology that has now enabled this product? So those are some of the questions that I’m answering at the seed stage over time and trying to figure out through due diligence.
William Leonard
Nice. I can agree with that. Right? You have this framework that varies by stage. And I think one of the biggest things that we ask is why now? Like, why is this going to get mass adoption right now, like you mentioned, a big piece of that, oftentimes, is regulation, especially within healthcare, climate tech, and I think soon to be like AI. You know, we hear about government intervention in regulation that’s impending with AI. And we just don’t know how it’s going to impact the industry. So I think there’s oftentimes a lot of opportunistic ways to build around regulatory tailwinds as well. But yeah, right, you’ve got this framework. Yours sounds like it’s primarily centered around the team market. Why now venture scale opportunity? You know, once you do complete this diligence, you say, Hey, I’m on board with this investment. And you’ve got some board observer seats as well, like from a non-partner level position, how are you supporting founders? I think it’s something that oftentimes, Junior VCs want to do, but often, maybe times struggle with impostor syndrome of, S3 I’m, S3 I’m a junior VC, like, I’m not a partner, can I bring value to add to this founder, if I’m a board observer, or whatever it may be whatever position you’re in? How do you think about bringing value to founders from a non-partner level position?
Nicole Bentz
Yeah. You know, I think it’s, I think you mentioned earlier that when you were in school, you felt like you were a utility knife for the companies you were working with. And that’s kind of why I describe myself as a utility player. But, but yeah, I mean, that’s kind of the exact approach that that we use in it. So a lot of it is it can be anything from helping a company to build out their financial model to helping them think through that option. Vanveen, right, they’re about to go raise or hire a bunch of people. Some of it is helping out by making introductions to the right types of people. So it varies, and I think it really kind of depends on what the company needs, and what they’re, it, it also, we’re not going to insert ourselves where S3 we’re, we’re not needed. So if the founder is willing to raise their hand or doesn’t, S3 that’s not on their priority list that’s not on their to-do list right now, then, then we’re not going to, S3 force ourselves into a situation. But I’d say in terms of, S3, what has provided value as like an early stage in a venture a VC earlier, earlier career. You know, one thing, that I’ve noticed is that it can be, I think, we discount as, just as junior VCs is the amount of reps that we have seen compared to even some of the most seasoned CEOs and executives. And I’m not saying that it is by any means to like, toot our horns. I mean, that it’s, it’s, it’s simply we’re looking at company Even CEOs day in and day out, and you start to, you start to kind of put patterns together, do that pattern recognition and see, hey, I’ve seen this movie before, here’s the two ways that this is likely to pan out kind of thing. Hey, I know that we’re keeping an eye on cash right now. You know, you want to go raise out in nine months, let’s kind of work backward from there because I know how long a fundraiser will take. So, so things like that. So a lot of it, I think, is somewhat, S3 VC, and fundraising focus. But keep in mind that I think that you, as a junior investor, oftentimes have more experiences in the fundraising realm, these within VC even stuff like S3 like, like, option grants. I work through option workbooks, S3 at least once a week, right, or, and you probably, as a junior investor, know, a lot more of the intricacies than a CEO does. So I wouldn’t discount that. I’m not gonna sit here. And I would say that I’m certainly not a marketing expert or a sales expert. Right. So I would, I would hope, lean on the experts within the team for that type of stuff. But those are kind of some of the areas where I personally at least try to provide value and think that you as a junior investor often do have unique insight, even if you think I’m not sure here.
William Leonard
Yeah. And I think that’s what it’s about, right? Helping the founders see around corners that you’ve historically seen, especially if it’s, S3 a first-time founder, but you’re, S3 Junior VCs, that’s been working in the industry for two to three years now. You know, companies on a similar trajectory to what you saw from the last Porco you worked with so you’re right, being a Swiss Army Knife being that all-hands-on-deck team player, is one of the best ways to exude your value. Great thoughts there, Nicole. And I want to shift a little bit to talk more about the current state of the let’s say the C plus series, a market, we’ve seen a lot of doom and gloom on social media, and S3 in the articles from PitchBook, and CrunchBase, whatever it may be curious to get your thoughts on what you’re seeing, and then how founders who were amid a raise, S3 or thinking about raising in q1, how they should approach the market now?
Nicole Bentz
Yeah. Yeah, I think a lot of what you are seeing out in the market, pitch book, and artists have been doing a lot of good reporting lately as well. It is right? Like it’s a tough market right? Now. I’m not going to sugarcoat it. The number of financings getting done around sizes, valuations, revenue, and multiples have all compressed significantly. On top of that, the number of bridge rounds inside around even down rounds are all increasing. It’s just the bar is just simply higher for seed and series A companies than it was even a year ago. And if I mean, I think right now, this is where, S3, November 23, like a year ago, we were already feeling that impression. So I think the bar has continued to raise. That being said, I do think that is close to stabilizing. When you look at kind of where it’s trending, it’s leveling out back to kind of 2018 levels. Which, if you think back at the time, those were like 10, year industry highs in VC. So I think it’s stabilizing, and it’s leveling to place, which is still a good place. It’s not like a total bottoming out at the peak is not like, S3 how the.com crash, or sorry, the valley is not like.com crash levels. In terms of, S3 I think that strong businesses will continue to get funded and continue to be able to raise. But I think a lot of preparation goes into that. Right? So if I were a company raising right now, I would focus not only on the vanity metrics, S3-like ARR. And some of that it’s not, S3 I think there’s a lot of confusion on the founder size and times around, where S3 how much weight is put into that. It’s important, but it’s not the end all be all if you’ve achieved a higher ARR rate, S3 run rate, but you’ve got a leaky bucket and S3 you’re churning customers left and right, then that’s not a fundable business either. So really being keyed into the business at all levels. Understanding churn unit economics, things like LTV to CAC, LTV to CAC. things that I think many founders sometimes roll their eyes at in the early stage like seed and series, An investor mentions them, but they’re important to the business. And they’re more important now than ever, especially walking into a completely uncertain fundraising environment. You know, you might have a strong business that would have easily raised quickly, a year and a half ago, two years ago, but it’s not going to be the case today. So you need to make sure that you’re number one, the job of the CEO, the business needs to open Morrow, right, you need to continue to survive in advance. So I think if you’re keyed in on like those metrics, and building a scalable and efficient business, then you will still be able to fundraise.
William Leonard
One thing that I’m seeing, still to this day is, I think, a real disconnect, of founder expectation for valuation. And sort of the reality of where valuations are today, I think I’m seeing a lot of who are maybe a bit stuck in 2021. From a valuation perspective, and from a traction perspective, as well. So I think one thing that’s continuing to persist, but as you said, the best companies with the, S3 the undoubted value prop, are still getting funded to this day have weighed in, we’ve recently funded several of those types of companies. And I think the best thing now is just relationship building. And like you said, focusing on metrics outside of, S3 ARR, because S3 your ARR looks great, but what is your churn, like? What is your Yeah, tension? Like, what is your, S3 what does your ACV look like? scale this to be a venture scale? The outcome is similar to what we mentioned earlier thinking about the market. So, there’s a lot to focus on, and the metrics aren’t black and white, ever.
Nicole Bentz
I think to like making sure that you can run as efficiently as a fundraising process as you can’t like, fundraising A is a distraction from you running your business, like, full stop, right? So do it, especially in a down market, doing everything you can ahead of time to make sure that the fundraise is as efficient as possible, and that you get back to running the business I think, is really important. I meet with founders, and it’s like, yeah, I’m raising, and they don’t have a they don’t have data and put together S3 Oh, I’d love to see a pitch deck. Okay, give me like a week and a half, two weeks, put it together, like do all that in advance. Not only doesn’t make a process faster for you, and more efficient, but also like, that’s just a, S3 frankly, it’s bad signal to an investor. If you’re telling me that you’re going out to raise but all the materials haven’t been put together, right?
William Leonard
Yeah, that kills momentum. Honestly, yes. No company like S3 you pitch it internally. You do your diligence request. And it takes a week and a half to get it back. And it’s like, wow, like, oh, lackluster. citement now, but S3 hey, things happen. We understand that I think as investors but a transparent shirt, in that process, is very important. So yeah, yeah, yeah. Yeah. And Nicole, I know you’re you’re so passionate about this series, a stage I know the firm has a pretty wide scope of seed to Series B, but you personally and we talked about this earlier, your passion, and your thoughts and your frameworks around series A investing are fascinating. Maybe you can tell us a little bit more just how you approach it and why it excites you so much.
Nicole Bentz
Yeah, I think like series, like the series, a stage is just a really interesting time for a company. Because you’re kind of focused on it. When you raise a Series A, you are telling the world hey, we are going we’ve achieved product market fit. And now we’re gonna go out and figure out if this is a business that can scale over time. So post Series A, I think companies often make their first investments in their go-to market team. They start building out hopefully scalable, the market motions processes. So you start hiring your first AES sales leaders, market leaders. And that’s that right there is almost the first test of the company kind of post series A investment, right like people other than the CEO or founder sell this product. And can you build a process that is repeatable over time, and that you can continue to hire, S3 not only a first aid, but your second and third, and they can get up and running as well? And it’s, what I like about it, too, is that it’s one of the first times in an early-stage company where you see the CEO start to take off hats, right? When I’m talking to see and even companies that are going out to raise their series, a talk to the CEO, and they’re wearing all the hats, face it all the hats possible, right? They’re managing everything. It’s they’re running late. It’s small teams. And so that’s one of the first times that you start seeing CEOs, hand off things to like true domain experts, you can go and run with it. And at least personally, and it totally, it seems like when that happens, you talk to them a month later after that, like that first sales hire comes in. And they’re like, oh, my gosh, I did not realize how much of you know how much of a relief this would be right? And how much they learn as well when once they bring in that domain expert. And so it’s kind of like the excitement, I think, immediately post-post investment. And over time, it’s just it’s so interesting because then you start to, S3 figure out, okay, is this a business that can scale over time? You know, long term? I think part of this is, because, in my mind, Series B is like one of the toughest rounds to raise. I’ve heard several people kind of compare it to the teenagers of the business. And so it’s really hard to prove that scalability, and I think to get to that point. And so that’s part and parcel. Also, part of what like posterior is an investment, what you’re trying to do, you’re trying to figure out can build efficient, scalable processes into this business.
William Leonard
Nice. Yeah, series A is such an interesting time and a true inflection point of the company’s growth. And we’re hyper-focused on the seed, but being able to see a company graduate to that level of maturity. And now, like you said, some of this weight comes off of the CEO’s shoulders of having to sell run the sales process having to, S3 be the head of partnerships, whatever it may be, right, right, you’re able to formalize and crystallize a lot of processes now, and scale them. So I can certainly resonate with those insights there. And as we as we wrap up the conversation, Nicole, I know, one of your favorite books is Shoe Dog by Phil Knight, tell us why that book is a favorite for you.
Nicole Bentz
I love that book. Partially because I’m also a bit like, just I love sports. I can’t say that I’m a Shoe Dog myself. But I just love sports and always have loved Nike growing up as a kid. And I think when he read that book for the first time, it’s at least for me, it was surprising how many times that business almost died. Right? The number of times in that book where he’s like, Alright, and then I got the whole team together and figured out what to do next. It’s, I think, one of the best books on just how difficult and how sometimes touch and go can truly be growing and scaling in early-stage business. And I think he does, he does a great job of kind of walking you through some of his, what he was thinking at the time, his mentality, and also the passion that is required on the CEO founder level to keep going even through the hard times. But it’s just it’s like, it’s a wonderful book. I cannot recommend it enough. But those are some of the reasons why I like it. Yeah.
William Leonard
Great book. Great story. Great company. But Nicole, it was great having you on the podcast, really appreciate a lot of your insights. And what is the best way that you know a founder who’s getting ready to raise or an investor who wants to reach out to you to share deal flow? What is the best way for them to get in touch with you or someone on the S3 team? Yeah,
Nicole Bentz
feel free to email us our emails are very simple. They are first name and then S3@s3vc.com. So my email is Nicole@s3vc.com. I’m on LinkedIn. I’m on Twitter now x all the time. I’m available on all the on all the platforms. Yeah, please reach out happy to always talk whether it be you’re going out to raise or just want to connect.
William Leonard
Great, Nicole, thanks for joining me today.
Nicole Bentz
Thank you
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