William Leonard
Circadian Ventures is a local venture firm investing in early-stage tech and tech-enabled startups across the country. I’m joined by firm Principal Steve Hasty on today’s episode, we talk about his consulting background and how he broke into venture capital through the venture fellow model, what type of companies the firm is focused on, and their valuation process. And then Steve and I talk more about the current state of early-stage venture today. And if the doom and gloom we see on social media is the true reality of the market, Steve and I dive deep and give you insights on what’s really happening at the ground level at Seed and Series A. This was a fun one to record and I appreciate you joining me. Let’s get right to it. Before we dive into today’s episode, the next edition of the Startup Runway is right around the corner. coming up in December we’ll be giving away multiple $10,000 grants for underrepresented founders at the Pre-Seed stage. So, if this is you or someone you know, feel free to apply at startuprunway.org. Now, back to today’s episode. Steve, it’s really nice to be joined by another local Atlanta investor. How are you doing today, man?
Steve Hasty
Doing great. Thanks for having me. I’m looking forward to it.
William Leonard
Likewise. You know Venture Atlanta is coming up. I’m excited to see you and some of the other investors and equally some of the other founders in town at the conference.
Steve Hasty
Absolutely. It’s one of the best weeks of the year. Certainly a busy time of year but we’re looking forward to it.
William Leonard
That’s right, man. I would love to kick this conversation off by having you tell us more about your background and your segue into being a venture investor. Tell us more about the Steve Hasty story.
Steve Hasty
I grew up in Charlotte, North Carolina. I started my career at KPMG. One of their innovation groups focused on automation software. This was a strategic growth initiative where they were investing in technologies that are gonna be prevalent three to five years down the line. Helped join that group as a second full-time employee. We grew to about 60 by the time I left. I went to go get my MBA at Duke. I want to either get on the operating side or the funding side of the venture environment, particularly in Atlanta. Not really sure exactly how to go about that. I reached out to a couple of friends and a family friend actually said, I want to introduce you to this guy named John Yates in town. I had heard the name only the day before, I was actually in an entrepreneurial strategy class. You may know that John’s in a Harvard Business case study. (“Ockham Technologies: Living on the Razor’s Edge”) The whole premise of the case is that sometimes, service providers can be game changers for startups. And so I said, no, I met John, but I’d read about him the night before. And so he said, “Well, I’m gonna connect you to Yates. He’s excited to meet you.” On a Friday at seven o’clock, I think it’s raining outside. You can barely hear John, he’s picking up Super Bowl tickets from the Omni Hotel. I outlined what I was interested in doing for about five minutes and then John cuts me off and says, “How about you just work for me this summer? I’ll introduce you to the folks that you need to know in Atlanta tech and we’ll go from there.” And so he did. My buddies who were interning at BCG or Bain thought that I was nuts working for a law firm but I was there working for John and for Ben Dyer that whole summer. Kind of near the end of it, they introduced me to Mike Dowdle, who I work with now. Mike was a former entrepreneur. After his last exit, he started doing some angel investing, and then when I met him, he was running a syndicate of angel investors. He’ll find a deal that he likes and write up an investment with a group of other angels in town. He put about $3 million to work across nine different deals and he was in the early stages of forming a fund. I met with Mike just to get my foot in the door. If there is any way I can provide value by doing your research for some of your existing portfolio companies, helping screen deals, helping put together a pitch deck for fund one that he was talking about putting together and Mike took me up on it. I started working for Mike while I was still in Durham on the side and joined him full-time in May 2020. We did our first close in October 2020 and then did our final close at $17 million in December this past year. As I’m sure you’ve seen as well, everyone kind of has a backward way of getting into the industry and that was really how I was able to land in Circadian.
William Leonard
First of all, shout out to John Yates, who is an incredible resource to the city of Atlanta and really a true connection point of many of the relationships in the city and even beyond the city of Atlanta. Definitely shout out to John for the work that he’s doing and MMM team as well. You have this background of working at KPMG. You get your MBA from Duke, you intern with John and the team, and then you begin to work in venture a little bit. I was reading up a little bit more about your background. I saw you also did a venture fellowship prior to joining Circadian as well. I did a venture fellowship as well right before my first full-time role in VC. I want to get your insights and I’m happy to share mine as well. Do you see venture fellowships as the most practical way for somebody who doesn’t have VC experience to break in?
Steve Hasty
It was unbelievably helpful for me. While I was in my second year at Duke, I was able to intern with Co-Founders Capital, which is a B2B SaaS-focused fund just outside of Raleigh. Essentially, what Tim McLaughlin and Tobi Walter do is they have a team of five or six Duke and Carolina MBA interns that essentially serve as their associate pool. They’re able to stay super lean at the partner level and they get access to a bunch of really sharp talent. For the intern, they pull back the curtain, you’re able to see exactly what they’re thinking about from an investment decisions standpoint, how they perform due diligence, and how they run the fund from an operations point of view. By being able to work with them, I was able to take almost that playbook and implement it at Circadian. It’s still kind of a staple of a lot of the ways that we do business today. I think it’s a great way to kind of get a foot in the door. We’ve set up an internship program in Circadian as well, trying to replicate that same model where it’s just Mike and me, a two-person team right now. We brought in our first intern this past summer in Emory MBA. We’ve got two interns working with us this fall from local universities. I think it’s a great way to provide access and experience in a field that is otherwise kind of tough to be able to get that experience.
William Leonard
I agree. As you mentioned, there’s no direct path to getting into VC. I think as you said, it unlocks access for those who may come from a consulting, banking, or product background to work their way into the industry. I can certainly resonate with all of that sentiment, Steve. Talk to us more about Circadian. Tell us the thesis. What types of companies are you all investing in right now?
Steve Hasty
We’re an early-stage, kind of post-seed, Series A investment fund. Investing $17 million fund one, typically writes checks anywhere from about $750,000 to about a million and a half. Our investment thesis really has three main processes to it. One, we invest in experienced entrepreneurs. So guys or girls who have either worked at a startup before could have been part of a founding team and didn’t necessarily have to be super successful but a startup background is really critical for us. Two, is all post-revenue companies. A big part of our due diligence, talking to customers and understanding buying psychology, price sensitivity, risk of churn, and value they get from the product doesn’t have to be a ton of revenue, but anywhere from about $500,000 to $2 million of ARR is kind of our sweet spot. And then third is to get investment opportunities when it comes to valuation structure and governance. We can lead deals, we don’t have to lead deals, we can take board seats, we don’t have to take board seats, there’s another institution who’s representing the preferred share class who we’re okay with being on the board, then that’s fine with us as well. We are generalist investors when it comes to industry, all tech, and tech businesses. But we’ve done 10 deals at a fund one to date. Eight of those have been B2B software investments. We do have two consumer deals, but on the B2B side, we’ve done everything from FinTech, Marketing Tech, Property Tech, Security, Data Analytics, and Hiring Automation to kind of a wide gamut of verticals that we’ve invested into. And then finally, we can invest all over the US. We’ve done deals in New York, LA, Pittsburgh, Austin, Texas, Nashville, Charlotte, a couple in Atlanta, and in Tampa, as well. That’s kind of where we fit in the market.
William Leonard
I love that. Very nice overview there. You’re a generalist fund. You’re looking for an experienced entrepreneur who has a kind of startup sensitivity in them already. It’s embedded in them. You all have about 10 deals, eight of which are B2B to consumer. So it sounds like you’re looking at a plethora of deals, whether it’s geography stage sector, how do you really evaluate those deals? Can you tell us more about your investing process? I guess, from a high level, how do you evaluate these deals?
Steve Hasty
For evaluation, we’re starting with the experience of the entrepreneur. Have they worked at a startup before? Have they done something innovative within their prior background? That’s really what we focus on at the early stage. We’re getting deals from a variety of sources, both inbound and outbound. Inbound comes from other entrepreneurs, could come from investors like yourself, could come from our limited partners. Outbound, we attend a ton of demo days conferences and investor meetings, and then typically we’ll have a couple of meetings with the management team. If we’re interested and we’re moving forward, we’ll start to draft up an investment memo. We write long-form, 10 to 12-page investments for each of our deals, really relying on the data room that’s provided and then talking to the existing investors or customers. That’s a big part of our thesis is all post-revenue deals. All these deals have had customers that we can go to understand what they were doing before this product came along, what other solutions they evaluated, what the budget cycle and sales cycle were, and then all of those eventually made their way into our investment memo. That memo is then provided to our Investment Committee. And then the last step is, the CEOs have a meeting with our Investment Committee, it’s voted on from there, and then we’ll make an investment. That’s kind of how the typical timeline for us. There are certainly different variables, whether we’re leading a deal or following on to a deal as to how long it takes, but all of them have kind of those cruxes to it.
William Leonard
You mentioned you’re writing this long form, potentially a 10 to 12-page memo, really off the back of a data room and customer feedback in the conversations. You and I were both on a panel a few weeks back at Atlanta Tech Village and we both spoke about data rooms, but I would love for our broader audience to understand what are some of the best practices for putting together an investor data room?
Steve Hasty
Every interaction that you have with an investor is an opportunity to impress. The last deal that we did, when we went to the data room, was the most thorough and thought out. They were tracking every single marketing metric you can imagine and then tracking that percentage conversion for a potential customer. You could just tell the stronghold that the CEO had on the business. My advice would that make sure that the data room is well thought out, has gone through several iterations, and is ready to really wow an investor because the initial conversation is one thing. Once you dive in and are looking at the financials in a realistic model, I think we talked about that a little bit on the panel, you want an ambitious founder. I think I referenced one where they said that they projected they were going to be the biggest company in the world within 24 months, and it was just really tough to level set expectations. These are gonna be long-term relationships. The best ones that I see are very well thought out. There are details that you can go down to the exact customer level. I’m trying to model out what a 10x return can look like and how many customers this company needs to get in order to get to a revenue number that’s going to result in a specific valuation metric that would be 10x from when we initially invested. The easier it is for me to do that, the faster and further along the company is going to go within our cycle.
William Leonard
I can echo all of that. I think that all is just core to the organization, right? I get so many data rooms, it’s just like 30-40 files just all thrown in one Google folder. It’s not organized, it’s not separated by whether it’s product, financials, or customers related. I think just basic organization can do a lot for how quickly an investor can get through your data room and that certainly impacts the time of closing that deal as well. I think literally, everything you said is really built on the back of an organized, thorough, well-thought-out data room. I appreciate that insight. I’m sure our founders listening as well. Shifting the conversation here, I would love to understand what you’re seeing in the markets right now. There’s a lot of doom and gloom out there on social media, and in the media outlets as well, but what are you seeing right now in the early stage markets, and how does it compare to maybe a year ago when valuations were almost at their peak? What’s different, what’s the same, and what are you anticipating the fourth quarter of 2022 to be like?
Steve Hasty
We talked before we hopped on, and we’re still seeing a ton of deal flow and robust deal flow in action. I would say the best companies are still big-funded. But within that, there’s a lot of inside rounds that are going on, where maybe an opportunity for an existing investor to reinvest into a company, as opposed to having the founder go-to-market where it’s going to take longer and they might get a lower valuation than they originally expected. We’ve seen a lot of those and those aren’t necessarily a bad thing for the market. We’re seeing some companies come back to market with smaller round sizes, to kind of reflect their revenue traction to date. in the fourth quarter of this year, I really think that we’re gonna see a big uptick here at the end of the year that could bleed into 2023. We’re in the midst of conference season right now. We were out in Greenville, we’re 3686 for Nashville, Venture Atlanta is coming up next week. We’re starting to see term sheets get done and a lot of activity coming through.
William Leonard
Deals are certainly getting done. I think this has been one of the more active periods for the Valor team as well as we’re evaluating several companies right now in late-stage diligence. I can echo that. I think the Q4 timeframe is going to be a sprint. I think people are going to be working through the holidays to get deals done just because of where the market is right now. I want to frame my next question around that because the fundraising environment has dramatically shifted from where it was this time last year. How should founders who are raising right now think about fundraising to avoid down rounds and flat rounds because many of the companies that raised this time last year are going through that process right now, maybe raising an inside round or flat round? Or even in some circumstances a down round? How can founders now who are fundraising craft their pitch in their fundraising to avoid those circumstances in the future?
Steve Hasty
Point considering, I think everything is an opportunity calls for your time as a founder. If you do want to go to market, I would start probably with my existing investors just because maybe you can get kind of a slight uptick, it’ll take a lot less time. Oftentimes, they might have gotten cut back in the initial round. This is an opportunity for your existing investors to right-size their round, you just start with their networks as well. Investors often know other investors that they can introduce the opportunity to, and then be mindful of your cash position. You can look at venture data as a nondilutive way of funding, although interest rates have gone up, that’s also something to consider. Cutting where it makes sense from maybe a marketing spend position. Or maybe you’re not hiring as much as you thought you would but still be opportunistic. There’s a bunch of great talent out there right now. You don’t want to push the brakes completely when it comes to that. The companies that we’re seeing still have focusing on their customers and the best pitches have customer testimonials at the front and center of, hey, this is an incredible product. It doesn’t matter what market we are in, bull or bear, we’re going to be spending money on this technology solution regardless. Really leaning on your customer base who love the product and I’m sure you’re saying the same thing because that just resonates so much more than any sort of pitch that a founder can give. Lean on kind of your existing customer base, and your existing investors, and go from there.
William Leonard
That is smart. Lean on those existing networks and relationships to open up those new doors. I think this market right now is so unique because I’m seeing personally a lot of rounds that are getting done, but it’s taking the founder, six, seven, maybe eight months to raise this round. I would say there’s still a bit of a bridge between founder expectation and valuation where investors are having their expectations as well. When do you think there will be a closing of that gap?
Steve Hasty
How we look at it is you start with kind of the public markets. I was having a conversation last week with a founder just kind of on valuation expectations. You look at the emergent cloud index and where those businesses are trading on from ARR multiple right now. It’s anywhere from 6 to 8x and these are companies that are doubling hundreds of millions of dollars in ARR year over year. Really tough when you’re talking to a founder as expert valuation expectations double, what some of these companies that are doing hundreds of millions of dollars are. You’re just being aware of this is how investors think and what we’re looking at when we are providing a basis for comparison. We talked about on the panel a little bit how much you’re raising really kind of dictates your valuation expectations. If you’re trying to raise $10 million on very little revenue, I’m expecting you’re gonna sell 20% of your business, then you may not even get further along in conversations with investors because they expect that you’re gonna want a $50 million valuation on less than maybe a million of ARR. Just be mindful of that and it goes into the market with fair growth expectations and will really level set with kind of the investor base and all your talent.
William Leonard
Only time will tell if that gap does eventually close, right? I’m really loving this conversation, Steve. I want to get your perspective as an early-stage investor, when a company pitches to you, what indicates that this company is ready for seed/Series A funding? What are the milestones metrics that founders should focus on the most to articulate that their business is ready for venture investors to come in?
Steve Hasty
I’m gonna sound like a broken record here but you have customers who love the product, sing a pitch that that’s more customer-centric where you’ve identified we can go deep into the segmentation of here are kind of the three segments that we go after, here are the average contract values for each of those, here’s the exact person we’re selling to within an organization if it’s a B2B deal for each of those segments. Jason Lumpkin had a good post that before bringing on a head sales, founder-led sales should become easy or boring, rather. You know exactly going into the conversation exactly how they’re gonna come back, here are the three reasons why here are the solutions that we’re using today. They should be repetitive, so repetitive to the point where it becomes boring before bringing on the head of sales. That’s when you’re likely going to invest in kind of a sales team and marketing team. The exact metrics and milestones are going to be different for each type of business. Maybe an enterprise solution may only need to be 10 customers that are paying $100,000 each. You can see the exact verticals that each of those customers is in and who exactly we sold to in each of them. If it’s more down market, then you’ll need to have more customers. As an investor coming back to it, I can model out exactly how many customers within which markets we’ll need to get to in order to try and get that 10x plus return from our entry point at our investment.
William Leonard
Right. I really like what you said about founder-led sales in the business. Is the founder out there creating this seeming repeatable, scalable, sales process that is maybe shortening what is now an eight-month sales cycle down to maybe five or six months? I think you articulating the value that your startup is bringing to the particular segment of customers, and that is spot on, right? When you see this repeatable sales organization starts to form, that’s how you know you’re ready for seed capital or Series A because now you can hire that sales leader to take this responsibility of selling off of your shoulders as a CEO or co-founder, now getting you back into the day-to-day organization focus of the business. I certainly agree.
Steve Hasty
That helps us out as well from providing value standpoint as an investor. Here are the 10 or 12 enterprise customers that you got to date. Here’s exactly what we sell into. Let’s say it’s a cybersecurity solution and here’s kind of what they’ve been doing to date and most of those enterprises, here are the five that we can start with diligence and then ultimately start pitching the solution as investors to our network of individuals who have these type of roles. That’s the great part about being in Atlanta. So many corporates are open to innovative ideas. But if you’re not at that stage yet, it’s tough for us to be able to take the solution to those individuals and you’re still learning. It could be that the product is serving a different customer base than you originally anticipated. Markets are going to continue to change and that’s why we invest in experienced entrepreneurs who know how to kind of navigate those and can get to a position where they’re in a position to really scale this thing.
William Leonard
Steve, that is well said. I can’t say it any better myself. As we wrap up this conversation here, you mentioned in your introduction here earlier you were an MBA student at Duke and you specifically were targeting Atlanta to come here to immerse yourself in the venture scene. I want to know, back then, why are you bullish on Atlanta? Now, obviously, you’re here with Circadian, what excites you most about the city’s momentum? Do you have any, I would say, bold predictions for where you believe Atlanta will be three, five, or even 10 years down the road from now?
Steve Hasty
There are a couple of things, at least in the past year, I’ve seen that I think we often take for granted being here starting with the Atlanta Tech Village. Having the ATDC, having the Russell Innovation Center, I mean, other cities that are mentioned in the same breadth and with Atlanta tech, don’t often have it. They’re working at WeWorks or they’re meeting at coffee shops. Starting with having these innovation hubs is huge. Second is really corporate innovation and open-mindedness. It really helps from a B2B sales perspective. It allows us more easily to diligence opportunities and allows us to use our networks to sell these solutions into those. Being the home of several Fortune 1000 companies is really huge. And then the third is the university ecosystem that we have here been next to huge research institutions is another thing that several other cities that are mentioned in the same breath as Atlanta Tech don’t necessarily have. And then the fifth on top of my mind, when it comes up next week, is the Venture Atlanta conference that we have covered. I mentioned these other conferences we went to in the Southwest and I’ve talked to other investors and entrepreneurs, several have said that the Venture Atlanta conferences are the best and most well run with great opportunities there. Having a major conference scene is also huge for us. As far as major or bold predictions, it’s nothing groundbreaking, but I think that Atlanta can follow Austin, Texas, let’s say, in being a city that’s mentioned with the New York, the Bostons, the Silicon Valleys, as next wave of Tech Cities that great deals are being done at, large companies can be built, huge amounts of wealth can be created within the tech community. I think you’ve already seen that in the past 18 months or so. But I’m sure you’re just as excited as I am to see what the next 10 years of the Atlanta technology ecosystem look like as we’ve come so far in the past 10 years.
William Leonard
You’re right. The city has come a long way and I think what really separates Atlanta is the corporate immersion here, right? You go to startup events throughout the city, you see corporate representatives there, it’s not just like it’s their own event. They’re coming out to events hosted by ATDC. Startup founders that are hosting events here, networking events, happy hours, demo days, you’re seeing the corporate support there in person. I think that’s something that Atlanta has a lot of uniqueness around is this corporate relationship that they have with the early-stage environment here. I’m incredibly bullish on the city, man. I think Atlanta has a long way to go but I think we’re well on the path to becoming a top-tier city in terms of startup output and in venture dollars housed here as well. This was a really fascinating, informative, and thoughtful conversation, Steve. I think our listeners are going to extract a lot of value from the insights that you share today, whether it’s around the metrics and milestones a company needs to have or more about the thesis at Circadian, and equally what you’re seeing right now in the markets as founders go out and prepare to fundraise for this last quarter of the year. I appreciate you greatly for joining me, Steve.
Steve Hasty
Absolutely. Thanks for having me. This is a blast.
William Leonard
Awesome. Cheers, man. Take care.
Lisa Calhoun
We’re thrilled to have you as an Atlanta Startup Podcast listener to help you get the most out of the experience. Let me invite you to three insider opportunities from our host Valor Ventures. First, want to be a guest on this amazing show. Reach out to our booking team at atlantastartuppodcast.com. Click on booking, It’s a no-brainer from there. Are you raising a seed round? Valor definitely wants to hear from you. Share your startup story at valor.vc/pitch. Are you a woman or minority-led startup valor sister program? The Startup Runway Foundation gives away grants to promising startups led by underrepresented founders. The mission of the Startup Runway Foundation is connecting underrepresented founders to their first investors. Startup runway finalists have raised over $40 million. See if you qualify for one of these amazing grants at startuprunway.org. You can also sign up for our next showcase for free there. Let me let you go today with a shout-out to Startup Runway presenting sponsor Cox Enterprises and to our founding partners, American Family Institute, Truist, Georgia Power, Avanta Ventures, and Innovators Legal. These great organizations make Startup Runway possible. Thanks for listening today and see you back next week.
