What VCs Look For in a Product-Driven Company

Published Sep 12, 2018

Spark Capital partner Megan Quinn shared a telling insight with me back in February, that one of her “joys in life” is having a product-oriented CEO.

“They are the product and the product is them,” she explained. CEOs with a product background have vision and they love being in the thick of the execution. In fact, her fund’s investment thesis is “that the product makes the business. And if the product is delightful and services its customers, all else will follow.”

How common is Megan’s thesis? Increasingly.

Last week I sat down with Rajeev Dahm of Sapphire Ventures to talk about his vetting process before new investments. Rajeev just became the newest investor in Pendo, as part of a Series D round announced this morning. Like Megan, Rajeev made his decision to invest after interviews with more than two dozen customers.

Turns out, it’s changed quite a bit in recent years. Growth-stage funds used to predominantly fuel sales and marketing—they’d help a firm hire an all-star sales team to drive a fast $50 million in revenue. That’s no longer sustainable or differentiating, he told me.

What is sustainable is “a product-driven mentality across the organization and a product strategy or philosophy that is a year or two years ahead.” That, combined with stellar salespeople, is “an unbeatable match.”

Marc Andreessen articulated this point-of-view particularly well in a July interview with author Elad Gil about the next steps of product-market fit: “If all you do is take your current product to market and win the market, and you don’t do anything else — if you don’t keep innovating — your product will go stale. And somebody will come out with a better product and displace you.”

So how can investors know a product-driven team when they see it?

First, their product should be differentiated in multiple ways, Rajeev says. It must go beyond creating a cloud version of a previously on-premise platform. It should be easy and intuitive without removing all of the complexity and depth of the product. There should be a nice balance between simplicity of use and powerful computing.

And product-driven companies shouldn’t just be communicating with users or customers during a quarterly business review. The companies he wants to invest in monitor and communicate with their customers regularly via multiple channels. They take that feedback to experiment, iterate and continue building more relevant and powerful products.

Second, is the leader. This person isn’t just product-driven, but market and customer-driven. During the pitch, Rajeev listens for CEOs to talk about customer satisfaction and cite product usage metrics, NPS scores, and churn rates alongside high-level ARR. He likes to hear about experimentation and A/B testing in those meetings, and understand how iterative is the product development cycle.

Intuition is important too.

“I’m looking for a person who has a very keen insight on the market and what customers are asking for and what they need without them having to say it,” he says. “A better understanding of user behavior is what enables a differentiated product.”

The old adage of the sales-oriented CEO isn’t totally gone, Rajeev says. Those skills are necessary if a company plans to go public—public company CEOs need to be powerful storytellers and sellers. But Rajeev believes there is a growing number of product-oriented founders with that storytelling DNA, perhaps from all the time they spend with customers.

The output of a greater focus on product in the venture capital vetting process is more interest in product as a category for investors. Alongside Pendo, companies like InVision, productboard, Gainsight, Airtable, Split and Alpha have raised funds in the last year. Rajeev believes investors will remain hot on software for digital product teams because so many functions in modern technology firms touch product: customer support and success, product marketing, design and user experience, data science, and even sales.

“Product is pervasive,” Rajeev says. “It’s become an overlay across the whole organization and companies need platforms to understand all of that.”