Investment Partner, Backstage Capital
What Customers and Investors Look For in B2B Companies
Christie Pitts: Hello. All right. That's me.
Christie Pitts: Do I hit play? Yeah. All right. Okay. Perfect. All right, we're ready to go now. Thanks for your patience. Okay. So I'm Christie Pitts. Um, I'm a General Partner at a venture capital firm called Backstage Capital. Backstage is an early stage seed stage firm and we have a specific thesis around our investments, which is that we invest in founders that we call underestimated. Another phrase for this is underrepresented founders. So specifically we're looking for companies run by women, people of color and LGBT founders. You might be able to see on my shirt it says diversity of strength. That's one of our core values at backstage. So, um, the reason why I'm here today is because I kind of live in this intersection of two different places in my life. Um, I'm, uh, I'm an investor at backstage. We have a hundred portfolio companies that we've invested in to date and just about half of them are B to B companies.
Christie Pitts: I also, um, you might, you might've seen this, you might not have seen this, but we just recently announced that we're running an accelerator or we're launching an accelerator. And, um, we were taking applications through just a couple of weeks ago. We had just over 1800 applications for the accelerator and 54% of those applications were for B2B companies. So you can see it's really important to me to understand as an investor what to look for when making sound investments. Uh, also, uh, backstage, we have the little bit of a unique structure. So we're a venture capital firm, but where we also run the operating company, which we call backstage studio. And backstage studio is a startup. Uh, we started, we incorporated in, launched in January of this year and we had about five people on the team at that point in time, maybe six. And now we just hired our 30th person last week.
Christie Pitts: So in addition to running a venture firm and making investments, I've also been helping to scale a startup. And in my role at backstage studio, I've been the decision maker on several B2B solutions. So you know, everything from like CRM to a signing leases on offices. I've been the one doing it, right? So like my life kind of works like this, like I'm an investor and then also like here I am a customer. I'm the person that's like emailing support to say hey, where's my invoice? Et cetera. So I thought it would be really helpful to break down from my perspective as I'm running a startup, a small business, what customers want. And then also from my perspective as an investor investing in B to B companies, what investors are looking for. And then we can kind of talk about, um, whether or not, you know, sometimes I think, I feel like people have shared, our founders have shared that they feel like their customers are leading them in one direction and they're investors or leading them in another.
Christie Pitts: And so I thought we could talk a little bit about how to balance those two different needs. And that's what we're going to do today. So let's start with what customers. All right. So I identified three main drivers of what customers want and I'm just going to be really real here. This is not a scientific study. I asked myself self, what do you want when you're making a purchasing decision? And I answered to myself, I said, I want a B2B company to solve a real problem for me. I want the solution that they have created to be simple and easy to understand and I want them to communicate clearly with me. So I'm solving a real problem. Something that's painful, they're saving me time, saving me money, or they're keeping it simple. I can't emphasize this enough and I can understand what I'm supposed to do, what I'm supposed to do it I know who I'm talking to and I understand where I stand with the company. So I'm going to start by telling a bit of a story of what something that we went through in the last year or so, a backstage. Um, okay. I want to keep the center active because it's nine in the morning. So can you everybody think about the last purchase that you made on behalf of your company? Like, what was something that you bought so that you could do your job and yell it out.
Christie Pitts: Plane tickets. Okay. Plane tickets are great. And any other kinds of purchases? What is it? Forecasting software. That's my favorite. All. So we, the point that I'm trying to make here is that even when you're not necessarily signing up for a longterm relationship with a company, you're making purchases all the time on behalf of your company. Like I purchased plane tickets on the regular, but we also make decisions like software and so forth. Right? Uh, and we were in this situation was backstage when we were very early on. We had our, our employees needed to make purchases, but we didn't have a good process in place for this. So to be pretty specific here, uh, what we first asked employees to do, like in the instance with plane tickets, is we said, just buy your own plane tickets and then expense them at the end of the month and we'll reimburse you for them.
Christie Pitts: Right. Uh, this was actually not a great process. It was a bad experience with employees because they had to wait for reimbursement. And sometimes like we have traveling internationally, the cost can really rack up and that's not a good experience when you're like, I'm waiting to get reimbursed. It was complex for us because we then had to go through everybody's expense reports, review against receipts, understand purchasing decisions. And that's not really like where I want to be spending my time or energy when I'm thinking about running my company. So was it a good decision? So then we were like, all right, let's streamline this instead of having people purchase and then expense for reimbursement. What we'll do is we'll have people purchase, but we won't have them purchase. Well we'll approve their purchases, then we'll have them send us an email and then we'll make the purchase on their behalf.
Christie Pitts: It'll be great. It was not great. It's sucked. So what happened is, uh, we were the bottleneck, right? So me and my cofounder, Arlin, we would say, anytime you need to buy a plane ticket, just let us know what your itinerary is. We'll go in and make the purchase for you. And obviously we can all predict what happened, right? So we will be traveling, Arlen will be on stage and an event speaking, and one of our team members would be waiting for their plane ticket to be purchased. Cost. The plane ticket is going up. Employees frustrated, has nothing as distracted from what they're supposed to be working on. And it was complex. It didn't work, sucked. Ultimately, when it came down to making employee purchases, this was the worst of all worlds. Those costing has employee satisfaction. It was costing US money and it was costing us time, my time, my cofounders time and my crews time.
Christie Pitts: Right? So we've solved the problem. The way we solved the problem is we can't, we became a customer of a B2B company called Bento for Business. And what I want to talk about with Bento for business. So I'm so excited about Bento for business and we didn't invest in them. So that should tell you like when you do it right, you get people on stage talking about you. Um, alright. So Bento for business is a fintech solution. It's pretty straight forward. Effectively what it is is, uh, it allows us to transfer funds into an account and that account has debit cards linked to it. Each employee has a debit card, the employees, we've set policies so they know what they can purchase and they can immediately make a purchase. It comes from the funds that are in the account done deal, easy peasy, solved our problems, uh, saves us money. We know, um, we pay a small SaaS rates who Bento per employee. It's very understandable business model. And that what we're paying to them far is far less than what it was costing us with the complexity of what we had before, which is poor process. Right? And then finally it's saving time. Employees have autonomy to make the decisions, purchasing decisions they need, they have the resources and tools to do it and they can move quickly.
Christie Pitts: Like I said, Bento is simple. So when it comes to thinking about designing products and solutions for customers, being simple is essentially it's, I just can't emphasize enough how critical it is and what when you break this down, what this means to me, the re, and I'm speaking of Bento specifically, but also it applies, right? So Bento does one thing really well. I'm not going to Bento and asking them to do things outside of providing us a solution for employee purchasing. That's what they do. They do it well. I understand how they do it. I'm able to easily access their website or their app if I need to make a change. So for example, if I have a new employee join the team and I need to add a card for them, I can do that in less than five minutes. I didn't, it didn't require somebody from Bento to set up a Webinar with me and train me on how to use their software.
Christie Pitts: It doesn't require anything that happened on the employee side. All of us are familiar with how debit cards work. So that was really great too. So it was intuitive. And then there's also accessible. So there has been, there've been a few times with Bento, like with any situation where I've had to call them because I've had a question, an issue or a problem and Bento has been accessible to me and quickly answers the phone, knows who I am, proactively follows up when the situation is resolved. Last piece here on how to successfully build products a what custom, what customers are looking for B to B companies is to communicate clearly. All right, so this first one, cost and pricing model is a huge deal, especially in today's world with Sass products because um, and a lot of times SAS products can be easy to understand from inside of your company, but hard for the customer to understand, especially if they're scaling quickly.
Christie Pitts: And with mental, it's very simple as a cost per employee, it's monthly cost, there's not a contract. It's understandable. Whenever I add a new employee, I get a um, summary of what that impact will be for my monthly cost and I understand what's going, what's happening going forward. Second piece is communicating. Any time there's a change that impacts your customer. So the reason why this matters is because we all know that whatever solution or product you've launched today is not going to be the same for perpetuity. There's going to be new features added, there'll be changes to regulation or within the market. That means you have to update your product. And, um, it's really important to handle when these changes occur, to handle the communication clearly so your customers know where they stand. So again, I'm going to use an example of Bento. Um, who here has a card with a chip in it?
Christie Pitts: Everybody. Because that's a standard in the u s today, right? We finally caught up to the rest of the world. I think Canada has had these chips since like 1982 or something. It's like full house was on TV and they had cards with chips and we barely had ATM. That's a whole 'nother talk though. Here's the deal. Our first set of Bento cards did not have chips. And we have employees based in six cities across the US and people that are traveling all the time. And Bento caught up and they issued cards with chips. But it was a little bit of a logistical challenge to make sure that the cards that had been sent out were all replaced with chips, with cards, with chips. And so Bento, tell me this really easy on us. First of all, they were proactive about letting us know when they were making a change.
Christie Pitts: They reached out, they worked with us to ensure that all of the employees that currently had cards got new cards. Once all the new cards were active, they followed up to make sure that we were satisfied. Simple sounds simple, but it was a great experience from my end. And then finally there's something else I want to talk about which is need to know when it comes to communication with customers. So with Bento, it's not so much about what they communicate with us as it is about what they don't communicate with us. So I'm going to be specific about what I mean here. I have never gotten a call from anybody up until asking me why I don't want to upgrade my plan or if I need to add a new or more employees to increase the revenue for them. Right? I don't get spammy emails from them.
Christie Pitts: My team members don't get spam emails from them. They communicate with us what we need to know when we need to know it so we can successfully use our existing product, but they don't bother me otherwise. And I think that's really important to point out because sometimes when we're looking at like when you're looking at your product and you're thinking we need increased revenue instead of trying to go get new customers, let's see if we can increase revenue from our existing customers. That's not a bad strategy. But the reason why I'm bringing this up is because it requires you to be really thoughtful about who you're reaching out to and what you're saying to them when you're talking to them. Because each interaction that you have with your customer has a cost or a benefit to your brand and it can either improve your brand, standing with the customers, they might feel more loyal to you if they get to try a product or feature out early or more likely if you're me, they might feel annoyed or they might feel that this is, this is chipping away from their experience, which has been good with you so far.
Christie Pitts: All right, so we're going to recap here, uh, what customers are looking for from B2B companies, right? That's the title of the talk, I think so. I Dunno, I wrote it, but they're looking for three things, right? Solving a real problem, painful costing them time, costing them money, costing them, causing issues with their employees. That's a real problem. They're looking for a simple solution that's easy to use and they're looking for you to communicate clearly with them so they understand not just how to use your, their product, your product, but they understand what to do. If there's an issue, they can access you. They know what's happening with changes and they know how to continue to work with you in the future. All right, so we're going to switch gears, everyone good to switch gears with me? Yes. All right. Give me a thumbs up if you're gonna switch gears.
Christie Pitts: Yes. Okay. All right. So now we're going to talk about what investors are looking for with B2B companies. You might see a theme here. I've also identified three things that investors are looking for. And I also want to tell a story about a company, a company whose CEO is actually here with us today, a company called [inaudible], which is one of our portfolio companies at backstage capital. And Margo who's from, hopefully we'll be speaking in just a little bit, so you're gonna hear a lot more about her company from her, but I'll, I'm gonna use it hopefully as an example for what investors are looking for because we chose to invest in hopefully, and we're proud of our investment. So first investors, well actually before I say that, let me explain just a little bit about what hopefully does. So that way there's some context, right?
Christie Pitts: So hopefully is a B2B company that provides software solutions for, for vacation rental companies. And if this, just to give some context, think about the last time that you went to Santa Cruz or maybe southern California. Uh, you may have been near the boardwalk and you saw a house near the water and those houses rent by the week. Sound familiar? Yeah. Okay. Good. When I was growing up, uh, as a little girl every year in the summertime, my family rented a house in the outer banks in North Carolina. Beautiful, wild horses, highly recommend. And the way that we run into these houses is my aunt would look through the newspaper, she would find the rental company, she would call them, she would find a house that could accommodate her family. She would reserve that house, she would write them a check and she would mail it to them in the mail.
Christie Pitts: Right. So this was really common, uh, how vacation rental companies were running, uh, in the eighties and the nineties. And unfortunately, um, we've all moved into, into the Internet and into digital tools and vacation rental companies have been overlooked. So, um, I'm sure that when we think about our last vacation that we booked, none of us made phone calls and sent a check in the mail, right? We used our phone or we use the web to book something and we were good to go. So that's what hopefully does. And then Margot (editor: Margot Schmorak) will tell you more later. But, um, here's why we invested in hostly we invested in hopefully because hopefully has great metrics. There's a huge market opportunity for Hostfully and they're well differentiated when it comes to that market. So let's talk about great metrics first. Okay. All right. I think it's better if I'm over here. So first, here's how we break down great metrics.
Christie Pitts: Number one, paying customers as a B2B company, this should be the beginning and the end. Do you have paying customers? The answer is yes or no. Free trial, no revenue. Yes. That's how you make the decision. That's the first metric you're looking for paying customers. Great metric posts. Bubbly hasn't growth. This is the second metric that we're looking for it. And there's a lot of rhetoric around growth for VC backed companies, growth at all costs, hockey stick curves that go up into the right. So really simple when you boil this down, growth means from week to week, from month to month you have more customers than you had before. Last metric churn. So the reason why I want to bring this metric up is because I feel like it doesn't get enough time in the limelight and it's really critical to ensuring that you have the growth curve that you want to see.
Christie Pitts: I think we all know a turn is, but I just want to level set here for a second. So anytime a customer leaves, didn't you have to go get one customer plus the one you left in order to maintain growth? Similarly, if you're trying to fill up a bucket, there's holes at the bottom, the bucket, you're never going to be able to fill it up with water, right? So churn is a really important metric that investors are looking at when it comes to B2B companies. Sometimes it's a little bit too early to tell what your turn metrics are going to be, especially when you've launched a new product. If you think about it, it takes time to turn right? The customer has to try you out and then they have to leave. But it's really important. There are indicators that you can measure even from the beginning to understand whether customers enjoy working with you and whether or not they're going to study.
Christie Pitts: All right. Second piece here from the investor side, large market opportunity. There's also a lot of rhetoric about, uh, what a market is and how to find a total adjustable market. I'm changing that up a little bit today. So what, what is very commonly heard about market opportunities is you take the total number of customers that you think that you couldn't sell to you with your products. You take the total price that you're gonna be selling your product for. You take one, you times it by the other, and you have your total addressable market, right? The problem with that is that it implies that you're going to know how many customers you can reach with your product. And the answer is if you know how many customers you can reach with your product, that market might already be a little too crowded and oversaturated for you to go into.
Christie Pitts: So let's talk about what it means to create your own market to address as a B2B company. First of all, you identify a huge pain point. We talked earlier about customers evaluating solutions based on how much this solution can solve their pain. Similarly, if you could identify a huge pain point in a potential market, it's a great way for you to create arbitrage in that market. Hopefully did that, like I mentioned earlier, vacation companies, vacation rental companies were being overlooked. They weren't, they're not being addressed by this software that we interact with as a customer and the people that were working at these vacation rental companies were spending tons of time just trying to get their properties online and then make the bookable for customers to use huge pain point. Second piece. It's an overlooked problem. So not the problem is that overlook problems are, they're right in front of you all the time.
Christie Pitts: No one else is looking at them. You have to go and find them. So you know, if you walk around, you go down to Santa Cruz, you see that house like, Hey, that house looks cool. Oh, you know how it, how can I book that house? I don't know. Maybe I'll check later on airbnb. And you go on and you have your funnel cake and you have your chocolate chip banana and you have a great day at the beach, right? Here's the deal. There's situations like that that are happening all over the country right now. And if you could find or all over the world, if you can find those problems and solve those problems, they're huge pain points for the customers. You can create a whole new market. And finally, uh, I want to add, I added a bonus down here. It's very mathematical. My Calculus teacher will be very proud of me.
Christie Pitts: I'm not. But the point that I'm trying to make is that you, if you can find this huge pain point and an overlook problem, you can also might see a barrier to entry. And what I mean by that is again, with hopefully with vacation rental companies there, the market is fragmented. So people, a vacation rental company that has 20 properties in Santa Cruz and Monterrey probably doesn't also have 30 properties in Laguna Niguel definitely isn't in Providence, Rhode Island. So in order for Margo to reach our target customers, she has to be very strategic in addressing this fragmented market. That means it's hard to do and it's a barrier to entry, right? So three great things that say dollar signs to me as an investor. Okay, differentiation. Last piece here. So we just talked about barrier to entry. New markets are yours for the taking crowded markets, they're hard to stand up as an investor.
Christie Pitts: What that means is that if I invest my money and hopefully on another B2B company, I know that Margot can use that money as a CEO to execute and execute our strategy, grow and do well. If I were to invest in a company that was addressing a problem in a crowded market, I would immediately have some questions for the founders about what their intended use of funds work. Specifically what I'm talking about is, is my money just going to marketing so that you can make your name for yourself and a crowd of companies look just like you or are you using my money to grow your business? Right. And that that's a very careful conversation that we have pretty regularly. So I'm new markets, yours for the taking crowded markets, hard to stand out. Last piece I want to make here, something that I hear very commonly as part of pitches as an investor is that I have no competitors.
Christie Pitts: My product is so unique. There's nobody competing with me. That's not true. Everyone has a competitor. Great example here is water's competitor is milk or LaCroix cause it's sparkling versus flat, right? Every company has competitors. So it's not to say that if you identify a new market and build for that market that you will have no competition in that market. It's to say if you're evaluating one problem versus another and you can identify multiple companies that have a very similar solution to what you're recommending, that's not easily differentiated. The new strategy is going to need to be very careful in terms of how you're going to succeed against all those competitors. All right. In summary, investors are looking for great market tricks, large market opportunity and differentiation. Customers are looking for you to solve a real problem, keep it simple and communicate with them clearly.
Christie Pitts: So how do you balance these two needs, right? When you have a customer over here and you have an investor over there, um, I'm going to keep this really simple, prioritize, prioritize your customers. So, um, I want to tell a third story that I didn't share earlier and we're going to keep this company with no name and it's a com, it's a CRM company that we chose to work with at backstage and we implemented it. Unfortunately, there was no adoption across the team. The implementation didn't go well and we were paying on a monthly basis for the service that wasn't bringing any value back to the company. Like any diligent leader, I thought, well, you know, maybe it's not the software. Maybe it's us. Like we need to change our own behavior so that we can get the value that we'd want to see. And so about six months after we had been paying for this software, um, although it hadn't been used at it at a big rate, uh, we had new people joining the team and I thought these new people could be, you know, maybe they'd be a good fit.
Christie Pitts: And if it's like on the very first day, I could get them into the software and they were using the software that they could be like my sleeper cell and get the software adopted across the whole company. Right. Do you see how delusional it can get inside of here? Right. So, um, what happened is I went on to add new licenses for the new people joining the team. It was like three or four licenses, no big deal. Oh. Except that I accidentally switched the entire company to annual billing. So the next morning I woke up to several thousand dollars charged against us. Right. Oof. That hurt. But I had already sold myself on this whole concept of these new people joining the team and they are going to use the software. And then we were going to have this great CRM and it was going to be foundational and brilliant for years to come.
Christie Pitts: So I talked to my co-founder, I said, Hey, I made a mistake. I set us up on annual billing, but I'm really confident that this CRM software is going to work out. It's going to be okay. She was like, oh, okay. All right. So, uh, what happened next? We all know the end of this story, right? The new people join the team. They got their licenses, they signed in on the first day, they sign in on the second day, they spend a little less time, this software on the third day. By the time they were with a company for a month or six weeks, nobody was using the software. So what happened there? The problem wasn't solved in a way that we could use a solution. So they didn't keep it simple, right? It's problem wasn't solved, didn't keep it simple and they didn't communicate with this clearly.
Christie Pitts: When it came time for us to end our contract with this vendor, what hurt the most for me was knowing that I had made a mistake of switching us to annual billing instead of monthly billing and I knew, I know that as a reasonably capable person, I wouldn't have made that mistake if I understood what I was doing at the time. Yet when it came to ending our contract, I had to accept responsibility that it was a mistake that I had made that really burned, right. Still bothers me here today. So anyways, I'm not going to tell you what the name of that company is. I'm sure we can all imagine what company might be, but that's that. But it's a very valuable lesson to learn. Right? And there is one, I want to tie this back to priors and prioritizing your customers is because I'm sure that we're familiar with the concept of net promoter score.
Christie Pitts: People that love your product and love your company are going to talk positively about it and refer customers, new customers. To your company as well. A great example of that is the free time I've been giving today to Bento for business. We're not an investor in them. We, I'm getting no kickback from them. I want them to succeed because I like using their product and so as an investor when I'm making a decision about what companies to invest in when they're B2B companies and it's going to be a large investment, one of the part process of the due diligence is I ask to speak to some of their customers and I have conversations with the customers and I know from those conversations whether or not the customers are satisfied. So when it comes down to if you have a customer over here or an investor over here, how do you balance who you should be or how you should be making decisions, prioritize your customers and the long run, that's what you need to do. Right. That's what I got for you this morning. Thanks for sticking with me at 9:00 AM we have just a few minutes if there's any Q and A or anything. Wow.
Christie Pitts: I think there's a mic right here in the middle. Yeah. Okay. Your mic's on.
Speaker 3: Thank you for that. So one of the [inaudible], these are all really foundational principles, right? I want to, I don't want to say common sense, but I don't want it to mean the present day. I thought that's awesome, right? That's what we all know we should do. I think the primary blockers, it doesn't happen. It's why the majority of companies fail is because we overcomplicate stuff as humans and so forth. So building on top of the kind of the foundation that we all know, what have you seen be that bs or at least some of the root causes for people not doing them can. I think that's actually the, the main thing that we run into is just not doing what we know is correct to begin with.
Christie Pitts: Yeah, that's a really great question. And I thought about that a lot when I was preparing for today because there are a lot of ways that we can back ourselves into a corner and end up not keeping these principles in mind. Right? Uh, I think ultimately what ends up happening and this, and I think back to that situation, this CRM company I mentioned where we ended up leaving, there were a lot of ways or there are a lot of things about our relationship that should've sent triggers for that company to let them know obviously the low usage is a very real of flag, but also when that switch happened from monthly to annual billing, I sent an email like cause I did it and let that several thousand dollars charge go by without following up on it and there was not really a response. Right. So I think if I was going to say how do you, how do you avoid getting into situations like that?
Christie Pitts: It's, it's really, it comes back to this same principle which is prioritizing the customer experience and the problem is not putting on blinders so much that you're thinking about shipping the next version of your product or solving the bugs that are already existing or maybe resolving a customer issue over here. It's about being able to rise above what's happening in the day to day and look at the long term. And I I know like am I in a past life I was a B to B marketer for enterprise clients. And it's really tough because you can sit inside your office and you could think like, this is what they want to see, this is what they need to see and this is what will help us hit our roadmap. And you, it's easy for us to invent that, but unless we know it to be true based on the behavior of our existing customers and research like conversations we've had with potential customers, then it shouldn't be adopted. One more. Yeah.
Speaker 4: Thanks for your presentation. Just taking a quick look at your Crunchbase right now. Uh, it looks like you invest in a couple of different seed rounds and varying amounts everywhere from sub 1 million to one to 2 million. Going back to your point about traction and metrics. Yep. What kind of metrics do you need to see depending on how much you're investing there?
Christie Pitts: Yeah, so we're really early stage investor. Um, on average, our check size today is 25K we call ourselves like the friends and family VC, right? So the reason why that matters is because, um, we're not always in a position to work with companies that have had their products in market for a long time. Um, and so one thing, a few things that we consider before, uh, making our investment if we're not able to see these things is it's hard to see great metrics if a product hasn't launched yet, obviously, right? So what we are looking for is, um, domain expertise. Like how did the founders know that this is a real problem? That's, that's underlies any investment we make, whether it's a B2B company or B2C company. And then the other things start tying into that, right? If you can identify it's a real problem, then you can understand how many people have this problem and what's the value of the problem and then what's the likelihood that you can be successful in solving it.
Christie Pitts: That's those are kind of the decision makers that go into it. Um, in terms of the amount that we're investing, we actually, across our portfolio of a hundred companies, there's been a wide range of performance across the companies before we've invested. So, for example, with Hostfully, a product was in market, right? So that was, that was really easy for us to see. But then I just shared some of the ways that we make, we evaluate, uh, for products that are prototypes and so forth. Good. Alright, I'm out of time. Thank you so much for having me.
Keep me posted on Empower 2019.