Early, Mid, and Late Stage Investing… The TSG Way

Our last two TSG investments were a Series A1 (Valtix) and a post-Series E (ThoughtSpot), prompting lots of discussion and opinions on the virtues of early stage vs. late stage investing, as well as TSG’s value at each end of the spectrum.  Inspired by my current read, Nobody Wants to Read Your Sh*t  by Steven Pressfield, and in the interest of keeping this to a digestible length, outline format here we go…

TSG baseline and some disclaimers:

• Not a typical venture fund
• Unique capital raise for every startup we invest in
• Capital comes largely from highly strategic individuals in the channel
• Investors are in a unique position to help the startup grow faster by selling (or buying) the product
• Investors are rewarded for their efforts with coveted investment access and exit upside
• Startups capture mindshare and focus from the folks providing a needed route to market
• TSG does not do Seed or Pre-Seed investing, so “Early” for us starts with A
• I’m generalizing.  If you get lost in analyzing or disagreeing with the particulars of each stage or how they’re labeled below, you may be missing the point…

TSG Early Stage – A, B

What’s happening:

• Startups are 1-20M revenue, beginning phases of GTM, maybe first dozen or so channel partners in the mix, trying like hell to get them to give a crap because most of them don’t even know who the company is.  Channel margins are rich but there’s no brand name and value prop / use cases are immature, making it difficult to sell.

Average investor view:

• Not as risky as seed investing, but still very high risk.  Decision based on knowledge of the specific market space, company plan, and trust in TSG.  Tremendous upside (10-20x) if it works, but have to wait longer (5+ years) for any returns

TSG value to startup:

• Get out of the gate much stronger by bringing more attention to the business, give the right partners a great reason to care about you at the early stage

TSG Mid Stage – C, D

What’s happening:

• Startups are 20-50M revenue, 20-50 channel partners onboard with 10% of them crushing it, 40% with strong potential if they got moving, and 50% totally useless.  Channel margins are (hopefully) still rich but not for long.  Partners paying more attention now but still holding onto competitive incumbent relationships, no critical mass yet.

Average investor view:

• Many see it as a sweet spot with strong upside (5-10x), not too long of a wait (2-5 years), much risk mitigated, competitive landscape easier to see

TSG value to startup:

• Reward the 10% of partners who are crushing it, light a fire under the 40% who need more motivation to go faster, and replace some of the 50% with net new partners who are happy to step in and go fast now

TSG Late Stage – D, E and beyond

What’s happening:

• Startups are 50M+ revenue, 50-250 channel partners and maybe, sadly, similar % breakdown as above still applies.  Channel margins are declining and the space is crowded.  The Channel is very aware, many partners now even offering the startup products AND their competitors OR perhaps even looking at the next-gen startups in the same space trying to unseat said startup…

Average investor view:

• 2-5x returns inside of 2, maybe 3 years.  Tons of risk mitigated, very safe play, more of a market dynamics and long-tail discussion now as opposed to questioning if the company will still be in business in 5 years.  Smaller upside but far less risk, and shorter lifespan on the investment. 

TSG value to startup:

• Fuel on the fire.  No complacency.  Mash the gas pedal through the finish line. Reward the partners who have helped you get to this point and give them a compelling reason to care about the your company’s success over their competitors who they also have the ability to sell.  Lock up mindshare and focus all the way through exit.

I get questions from investors all the time about coming in at various stages and really it just comes down to personal preference and risk profile/tolerance.  Some prefer later, while others love the earlier stuff, and many folks will take it all to diversify.  For the startups, while we are working on a very high-value play for the Seed stage companies, TSG is very fortunate to have a strong offering at all of our defined stages as outlined above, and have just as much fun with the offering all along the spectrum.