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Investment Criteria

At S3 Ventures, we always begin with the end in mind. For us, the end is a large, profitable, predictable, cash-flow positive business that is delighting its customers. We are looking for the management team to explain to us where the business and markets are now, and how to navigate through the waters ahead to profitability. Nearly every early stage company we have worked with is in a phase where they are losing money. This is why an investment is needed, to overcome a capital deficiency in the path. We want to hear your story, your business’s story, and how we can work together to build the next big thing.

As we work with you, we will explore these questions:

  • How is the technology and solution novel?
  • Is the market large enough for the company to grow big quickly?
  • Will the sales model work?
  • How much external funding is needed before the company can fund itself on sales instead of investor dollars?
  • Is there an attractive outcome for founders, employees, and investors?

 

Our ideal scenario is to partner with companies that can grow from their current state to a scalable model on $10M to $20M of invested capital. In some situations, S3 will fund the business as the sole institutional investor.  In most cases, we find partnering with other capable investor groups to be ideal. In the past, we have worked with Accel Partners, Austin Ventures, Battery Ventures, BPV Capital, CTAN, HAN, Harbert, HealthPoint Capital, Performance Edge Partners, Sante Ventures, Sequoia Capital, strategic investors like Abbott, Baxter, Boston Scientific, Medtronic / Covidien, and angel investors.

Let’s dig deeper in the five areas mentioned above.

Technology
Whether it is a SaaS, Enterprise software license or medical device, technology is the base ingredient for nearly every business we fund. S3 is interested in novel technology that can be shaped into products that solve large business problems. The world is replete with cool technology that solves small problems. S3’s interest is in solving big problems, ones that increase business efficiency, create advantages for business that use the solution, or consequentially improve the human condition.

Markets
Simply put, big and rapidly growing markets are exciting. They offer the acceleration that young companies need to grow into very large enterprises. They also attract competition, so knowing the market dynamic is critical. What problem is the company solving and how much will customers pay to solve it are keys to understanding how a business can grow. Gross margins also play a large factor in determining the pace of growth. In our experience, margins above 60% in hardware businesses and above 85% in software businesses are necessary for rapid growth.

Sales Model
We are interested in companies with sales models in which a direct sales person can make a $1.5M annual quota or more. As one might imagine, making a $1.5M quota each year is easier when selling $100,000 products vs. $100 products. So, what is the sales model? How will the company get its products in front of customers and receive purchase orders? How many will they buy? How often? For how much? With what effort and cost?

Financial Needs
This is where the science and art, and a little experience, come together. Capital efficiency is one of our mantras at S3. We are seeking companies that can achieve a cash-flow positive model on $10M to $20M of invested capital.

We invest in companies in the Series A, Series B, and Series C+ stages. While there is quite a bit of variability across early stage companies, in our experience, companies achieve the following milestones in these stages.

  • Series A – Take the learning(s) from early customers and develop a repeatable, scalable go-to-market strategy. Make additional hires on the executive team in key functional areas, especially sales and marketing.
  • Series B – Now that a repeatable sales model has been developed, invest to scale the business. Round out the executive team.
  • Series C+ – Make management hires, produce follow on products, rapidly grow the business.

 

Outcomes – great companies are bought not sold
We are looking for interesting outcomes that come in two types: acquisition or IPO. In the acquisition case, which is more likely, a larger company decides that they absolutely must have your company and purchases all its shares. In the IPO case, the company can continue to grow independently, yet it has additional capital to deploy for growth or other opportunities. In both outcomes, founders, employees, investors and shareholders are rewarded for all the hard work along the way. We hope we can help you on this journey!