From Seedlings to Category Kings: An Interview with Pietro Bezza, Connect Ventures
An interview with Pietro Bezza, Co-founder and General Partner, Connect Ventures
Connect Ventures considers itself the home of Product Founders with an uncanny knack for backing companies that have ended up category-defining businesses. Pietro who leads B2B SaaS investments at Connect, has himself led Seed rounds in Soldo, Typeform, True Layer, Forest and Lanes & Planes. Connect was also the lead Seed investor in product companies like Citymapper and Stairway (Consumer), Second Nature and Kheiron (Digital health), Curve and the recently announced Emma (Fintech).
We’re speaking in the middle of the Coronavirus pandemic. Before we talk about business, are you OK?
I’m very grateful that my family and the Connect team are well and healthy and so are my friends, the founders and people I work with. On the other hand, I’m sad and concerned about the global impact of this pandemic on people’s lives, on society and the overall economy.
And along with this combination of feelings, I’m also trying to enjoy this new remote world as much as I can, which imposes some unique working methods that mix work with play. I am sharing my work-from-remote space with two children of 4 and 8 years old, so it’s stressful but we are all learning a lot and it’s also kind of fun.
Coronavirus has been a shock to the whole economy. What has Connect Ventures’ approach been?
We aspire to stay pragmatic, adaptable and optimistic.
We recognise that some companies’ product and value propositions are becoming less relevant or even temporarily obsolete. Others have become more valuable. In this new world, Zoom is now more valuable than Uber!
We have worked very closely with each of our portfolio companies to help founders navigate proactively this exceptional situation and take action. Everyone has done something to improve their position and it’s been phenomenal to see how the companies have adapted and reacted in just a couple of weeks.
The macro narrative is of course that cash is now king. We are suddenly in a world where being able to weather the storm is what’s important. Every company must find a way to do that, either by finding alternative revenue streams, increasing their revenue opportunity, topping up by fundraising and, of course, reviewing the cost structure to create enough runway to be able to survive and move forward when this crisis ends. In Japan, there is a technique called Kintsugi, which means “Golden Repair”. When a beautiful pot is broken, it’s repaired with gold. Companies will overcome this crisis, and, like Kintsugi, as a result, they will be stronger and better.
In Japan, there is a technique called Kintsugi, which means “Golden Repair”. When a beautiful pot is broken, it’s repaired with gold. Companies will overcome this crisis, and, like Kintsugi, as a result they will be stronger and better.
We are also still active on new investments. We have adapted our investment and valuation process for this new world. We are learning the dos and don’ts of remote pitching. We have just offered a term sheet to a Berlin-based team after a fully remote partnership pitch.
You’re clearly founder-obsessed. What makes a great founder for Connect?
I am a founder-obsessed investor; and at the same time also product-obsessed and, more recently, category-obsessed.
Founders first. Let me start with what I believe are evergreen attributes that make a great founder. Then I will tell you what makes a great founder specifically for Connect and our investment thesis.
There are entrepreneurial traits that I believe are necessary for a great founder, and which are universal irrespective of the industry or market. I’ve seen these traits in the best founders that I’ve known and worked with. For many, these include courage, risk-taking, resilience, the ability to win customers and so forth; but for me, the overarching superpower that fuels all these great traits is optimism. It’s in the DNA of every great entrepreneur and it’s what makes the impossible possible. And making the impossible possible is what it takes to turn a little startup into a dominant global player.
Another characteristic and one that I think is very much connected to optimism, is creativity. To see things that others don’t. To combine a lateral thinking approach with a vertical understanding of a given industry. This is ever more important nowadays. We live in a global, and high-speed world where it’s hard to predict the future and therefore almost impossible to adopt off-the-shelf solutions. Right now, in the Covid19 crisis, I’m wowed to see how phenomenally our founders and CEOs are coping with the exceptional circumstances we find ourselves in. It’s very inspiring to me. Across the spectrum, they are exhibiting incredible leadership and determination to make tough calls. I see plenty of optimism, creativity and speed to adapt. I love their fighting spirit – they are warriors, and I’m very proud and grateful for being part of their journey.
These are all emotionally intelligent characteristics, not the typical MBA know-how…
Without doubt. Self-awareness is another attribute of the best founders I’ve worked with. Knowing what you know and what you don’t helps you to focus on your strengths and to delegate for weaknesses. This is important because in fast-growing startups the golden rule for founders is: what got you here, will not get you there. We’ve seen this pattern many times: the skillset that founders need during the journey to achieving product-market fit won’t necessarily be what they will need in the growth stage. Or afterwards, what they need at scale, etc. The point being, each stage of the company cycle requires a different playbook and a different toolkit, and founders must stay on top of their learning curve. If you’ve been a successful founder entrepreneur, you might have an advantage in your second venture. But either way, the best founders are those who are open-minded, curious and good at receiving feedback and advice. Carlo [Gualandri, founder of Soldo] is probably the most experienced founder/operator I’ve had the good fortune to back and work with; and he’s probably also the most humble. He’s truly inspiring but I think that humility is the secret of his success.
From Connect’s point of view, with our investment thesis in mind, when we’re evaluating what we think makes a great founder, there are two superpowers we look for: purpose-led and product-led.
Purpose is what defines a founder’s motivation and behaviour in the long term. It’s the first thing I try to understand about a founder. I am interested in connecting the dots: why are these Founders uniquely fit to solve this problem, and why now?
We have a conviction at Connect that Purpose-led founders are the best equipped to create larger and longer-lasting companies. They are obsessively driven to solve a problem and will never stop. The journey of a purposeful company never ends: these founders are always looking for the next better version of the product, or always trying to solve an even larger adjacent problem at a larger scale. They will keep re-inventing the product innovation over short tech cycles.
They are not driven by monetary success: financial reward is important but it is only a result and reflection of success in solving the problem. We think that people who just seek financial reward will tend to flip their companies earlier.
The other defining characteristic we seek in a founder — if not the defining characteristic of our investment DNA – is obsession with product.
How would you define a Product-led Founder?
Product-led founders put product and user experience at the core of their company-wide strategy. They have unique insights, find a new, unsolved problem and design a purposeful product to solve it. And then convince the market to want that product and pull for it. Product-led is a very unique strategy, different from building what customers ask for (customer-led), what the sales team can sell (sales-led) or what an R&D team can build (engineering-led). Product-led is the path to true innovation and to creating new market categories.
The hard truth we have learned is that you can’t make great products just because you want to: you make great products by fostering the conditions and the culture in which great products can be made. Only truly product-led founders have the DNA and the determination to design and promote these conditions. It is a macro principle and applies to all execution decisions. How you allocate money, who you hire, what you reward, how you drive growth and marketing, what you prioritize, and eventually what VC you pick. As investors, shareholders and board members, we are fully aligned on product-led as the ultimate business strategy.
At Connect we firmly believe in the fact that product-led companies are the most successful, the most efficient and ultimately the most valuable. We have seen first-hand that a product made with love and loved by users is a phenomenal driver for success and a defensible competitive advantage, both in the short and the long run. Typeform, Citymapper and Second Nature are great examples of this power.
Ultimately, product-led companies are built by product-led founders. We call them ‘Product Founders’ and we have committed to making Connect Ventures the home of the Product Founder. That’s the reason for our tagline “Where Product Founders Fit”.
Ultimately, product-led companies are built by product-led founders. We call them ‘Product Founders’ and we have committed to making Connect Ventures the home of the Product Founder.
You are a huge evangelist for “category design”. You write in a Medium post that “products are orphans without a category”. This is a constant issue in tech innovation: helping people to understand that they might want something when they have never even conceived that they could have it. How can founders use category design to define their space?
Category design is strictly connected to Product-led Founders. They are two sides of the same coin. In fact, Product Founders need to be product designers and category designers at the same time. One mantra of category design is that in order to create a dominant company you don’t just need to create a legendary new product, you also need to create a legendary new category. They have to invent a whole new game rather than trying to beat the competition at the old game.
Tech innovation is the ultimate job for a Product Founder and innovation is about thinking differently: to look not just for a better solution but for a radical new solution. By creating a different product, you are intuitively creating a new category, because you are choosing to solve a problem differently or a problem that people didn’t even think that they had. Steve Jobs, one of the best product founders and category creators of all time, said: “people don’t know what they want until you show it to them.”
The requirement of category design, then, is not to limit innovation to the product, but also to create space in the mind of the consumer for that specific new product. Most of the time in fact, there’s not even a market for the new product. Or if there is, it is the founder’s job to condition the market to want it and then to have it. That’s why I always say that a category is the most valuable real estate in the world: a corner of the customer’s mind.
Category creation is a long journey and a big commitment. It requires evangelising about the problem rather than your product; conditioning the market to understand this new problem, in preparation, of course, for your product to become the solution. That’s why the mantra of category design is that the company that defines the problem and frames it first – where the problem is a proxy for the category – is the one best positioned to win the category. And dominating a category is the best way to create massive value. Category kings concentrate 70%+ of market share and market valuation capitalisation. Therefore, it’s an uphill struggle for the second or third in class; and that’s why the dominant position injects success into the flywheel.
What is the category flywheel?
It is a self-propagating accelerator of success.
Category kings can leverage their dominance in every aspect of their operations. The best executives want to work for the best company. VC investment is going to concentrate on businesses which are perceived as winners. This compounds their success: better talent creates even better products, which produce more customers and more word-of-mouth. Which generates more growth, more revenues and hence more resources to attract the best talent. Each factor feeds into each other, making the flywheel turn.
It’s a 10-year journey. It takes three or four years to create a category and another six at late-stage to dominate it. However, category design core principles are universally valid, whatever the stage of the company. That’s why at Connect, as a seed-stage specialist, it’s our job to make founders familiar with the category design playbook: the earlier founders can learn and become aware of the power of category design, the better.
You are seed specialists. How do you pick, assess and validate ideas pre-product and pre-product/market fit?
Yes, we are a seed-only firm; in fact, we are almost always the first VC into the company – we even invest in the formation stage. We’ve made 55 investments in seven years, 50% of which were at the pre-product stage: just the founding team and maybe a few lines of code.
For me, investing in companies at this stage is very challenging, but also fascinating. At seed stage, you have the highest volume: it’s at the top of the funding funnel. But it’s also the stage with the lowest signal: we have to pick investments with no objective data, no market validation, no traction indicators. In a way, it’s more art than science.
Now, that doesn’t mean it’s just art, or instinct. At Connect, we have tried to convert the art into a repeatable process; to understand these early-stage companies programmatically. The formula is made up of pattern recognition and heuristics. It is our know-how, our special sauce.
That’s exactly why our investment thesis formed around purpose, problem and product design is so powerful. These elements are always available at seed. It provides a framework that helps us build conviction early, working as a special lens enabling us to envision the full potential of a company in the absence of traction indicators.
Are you still refining the model?
Sure! We started to apply this process four years ago. Now we’re collecting and assessing all of the input data from our ventures, although of course, the feedback loop at seed stage is slow. But this thesis and pattern recognition is how we will create our competitive advantage in the seed market.
You’re very passionate about the future of work. I want to know why, because I’m guessing that it’s a theme which influences your investment strategy. At least, I think you see value and opportunity in a changing workplace…
Improving the way people work is a foundational part of the Connect mission. So as an investor but also as an entrepreneur and father of two, I am very interested in understanding what are the drivers of progress and how I can do my (small) part.
There are profound changes in the structure of work that are the cause or effect of software innovation: smart automation, remote working, freelancers, and the Passion economy.
Smart automation revolves around the impact of Artificial Intelligence. We believe in the adoption of machine learning for building products that augment human capabilities via automation and personalization rather than replacing it. This thesis has guided our investments in companies such as Kheiron, GenieAI and LifeBit, where machine learning algorithms work alongside human professionals (i.e. radiologists, lawyers and bioinformatics) to augment their abilities and performance.
Another highly impactful change we are witnessing is that the traditional centralized way of working is devolving to a distributed, remote model. Remote as ‘work from home’ was an already established model that certainly is accelerating due to the restrictions imposed by the coronavirus pandemic.
However, remote work in the sense of being employed and operating remotely from another country, well, this model has a long way to go. To fuel growth every company needs access to a distributed global talent pool. The vision is that every company will be empowered to hire anyone anywhere. It is inevitable. But today there is still a lack of enabling software infrastructure.
Let me explain. The world is full of talented people. And the world is full of great jobs. Finding great international talent has become easier, but hiring them has not – here lies the problem and the opportunity. While technology, in fact, has made remote collaboration and communication fast and simple, international hiring is still fundamentally broken. This conviction led me recently to back an exceptional product founder who is building a B2B SaaS platform for remote HR and Payroll. It will dramatically simplify the process of hiring across international borders – creating a better experience for both employers and candidates around the world. In conclusion, we already have remote working. Now the world needs new platforms to empower remote hiring.
Finding great international talent has become easier, but hiring them has not – here lies the problem and the opportunity. While technology in fact has made remote collaboration and communication fast and simple, international hiring is still fundamentally broken.
The third trend is the rise of the freelance generation. This inevitable paradigm shift towards flexible jobs is causing millions of workers to now operate as freelancers outside the conventional employer’s perimeters, with no access to a full range of software and services. Technology empowers the freelance economy, so that freelance talent doesn’t end up being treated like a second-class citizen. We must open up financial services, payments, training and career management to freelancers. That’s why I invested in EduMe: a micro-training platform to enable companies like Uber to train and make successful their external workforce: the drivers.
Lastly, I am keen to invest in platforms for the creative class that empower entirely new forms of work. The so-called passion economy. Individuals like chefs, mental health coaches or surf instructors seek to turn their expertise and passion into scalable business but they lack the software, the tools and the distribution. Here the opportunity for an operating system made of SaaS tools, payment and mark-tech to empower these micro-businesses.