Investor Stories 455: Lessons Learned: Building Investment Criteria, Missing HubSpot, and Staying True to Your Model (Madera, Agarwal, Bussgang)

**Nick Moran** (0:00)
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**SPEAKER_2** (0:44)
Welcome to the podcast about venture capital, where investors and founders alike can learn how VCs make decisions and reach conviction. Your host is Nick Moran, and this is The Full Ratchet.

**Nick Moran** (1:00)
Welcome back to TFR. On today's special segment, we ask guests to tell the most important lesson that they've learned in their career. Here's the segment called Lessons Learned. On today's special segment, we have Paul Madera, co-founder and general partner at Meritech. What is the biggest mistake or the hardest lesson that you've learned as an investor? And what's the story behind that lesson?

**Paul Madera** (1:28)
I can't tell you any specific stories without outing the guilty. So, but as you can imagine, when we got started with the help of our sponsoring funds, Excel, Red Point, Oak and WorldView, they had portfolios full of companies they'd invested in in the 90s. And as they got, as we went through the tech bubble, money dried up, opportunities dried up, a lot of their portfolio companies needed financing that was not available from anyone else. So some of the partners would come to Meritech and say, hey, here's the company, you got to fund it, please write a check. And we would look and figured out that if we invest in all those companies, that it would not let us raise our next fund. And so we had to very carefully and thoughtfully sort of create a set of criteria that made sense to invest on. And we follow that criteria to this day. And then we actually followed and then stuck to it. And then and it worked in terms of helping us stay focused in the right and the right area and the right stage of company and looking for the right metrics.

**Nick Moran** (2:37)
Can you tease any of the criteria without giving away the secrets?

**Paul Madera** (2:41)
Yeah, we want to see 10 million run rate. We want to see very strong growth. We want to see a business model that wasn't sort of 0% gross margins, but going to improve in the future. We wanted to see a sales force that was reasonably efficient. By the way, when we are investing in SaaS companies, there were no metrics. I mean, today we all have this wonderful set of metrics to look for in terms of payback, in terms of efficiency and lifetime value. None of that was existing. So we were trying to make it up as we went along and we use those. We use those, we developed our own to make decisions. By the way, the dealer socket guys, just to tell a story, the dealer socket guys were so incredibly efficient with their Salesforce that when HubSpot showed up at my office and effectively begged me, they were begging me to invest because I'd been in Salesforce, I looked at their efficiency metrics and I said, gosh guys, you know, sounds really cool, but this is terrible.
I just, I can't get behind it. So passed it up and of course that's another one that I missed.

**Nick Moran** (3:49)
Sometimes, you know, when a company does something so well, it's a standard that, you know, others can't be held to.

**Paul Madera** (3:55)
That's exactly right. And I didn't know it. I missed it.

**Nick Moran** (4:04)
On today's special segment, we have Medha Agarwal of DeFi. What's the biggest mistake or the hardest lesson you've learned as an investor?

**Medha Agarwal** (4:13)
It's a great question. I think the biggest thing I've learned is to listen to a founder's vision for what their company, what they want their company to be and where they want it to go. I'm on the relative spectrum of investors. I would say I'm much more thematic. And so I often come in to conversations.
If I say, we were talking about supply chain and logistics, I've probably met three or four dozen companies over the years that are doing something in supply chain and logistics. And so I have a point of view on where the opportunities are, where I think there are opportunities to improve workflows, build large businesses. And I think it's really important to get excited about the founder's vision and what they want to build versus coming in with excitement about my own vision of what's possible and what this company could become because it's so early. And I can see how this company could go solve some of those problems. And oftentimes those things could be the same, but sometimes they're different. And it's really important for me to recognize that.