What It Takes to be the Next Uber: Getting to Your Series B and Beyond

Version One Ventures is an early-stage fund investing in outstanding consumer internet, SaaS and mobile entrepreneurs. Its portfolio includes successful platform companies like AngelList, Clarity, IndieGoGo, and Figure1, as well as many others. I recently talked with Version One’s Boris Wertz and Angela Kingyens about what they look for when investing in platform businesses. This is part two of of our conversation. Below we cover what investors look for in companies raising their Series B, as well as what the a few of the characteristics are that make businesses like Uber and Airbnb so special . You can find part one of our conversation here: How to Raise your Series A.

Q: Last time we talked about what it takes for early-stage company to attract interest in a Series A. So say now a company has reached critical mass, and its gotten its Series A and is looking to expand. How does it get that Series B investment? What do you look for as a VC?

A: The first thing we look for is retained engagement. This is usually good evidence of a quality user experience.

The company also needs to show that it has a good understanding of what drives activity in its users. Can it demonstrate increases in the number of transactions or interactions? Is usage increasing among typical users? Does the company understand why these changes are happening?

Usually it’s a combination of three things that’s driving this growth: improved or increased services, attractive pricing or an attractive value proposition and network effects between users. But an entrepreneur needs to show us they understand what’s happening in order to attract interest.

Q: That sounds like a sound approach for determining whether the platform is functional. How do you assure it’s being optimized?

A: We also look at the company’s user experience and conversion funnel. This is along the lines of the classic analysis of how you convert user behavior along a tightening funnel. They should be making it easy for users to convert all the way down the funnel and reducing barriers to entry for users, especially producers. For that reason, high number of dual users – meaning users who are both consumers and producers – is also a good sign.

Q: What differentiates two established platforms in the same space from each other?

A: Consider the state of community development. How frequently are your users interacting on the platform? Ideally you don’t want to see a lot of MAU‘s but few DAU‘s. The platform should have figured out effective marketing channels in order to drive that regular engagement. A great example is Shazam’s weekly list of the top ten audio tracks. It’s been very successful at helping them engage users on a regular basis and bringing them back into the platform.

A lack of regularly active users can also indicate that the platform hasn’t figured out how to match users with the right experiences, which would be a concern as it tries to scale. Often as a platform scales, quality can fall if this kind of curation isn’t done properly, and this can drive users away (just look at MySpace, for example).

One way to tackle this problem is to target the most active users and empower them as “champions” within the community. Wikipedia does a great job of this, for example, and its active community allows it to maintain quality in a huge platform with very minimal resources.

Finally, we’d look for strong network effects between platform participants. You want to see the value the platform delivers to each individual user growing as more users join the community.

Q: Now what do the Uber- or Airbnb-level companies have in common? What does it take to be a large, late-stage venture round recipient?

A: Both Uber and Airbnb have solid penetration of a large market. That’s the first thing we’d look for: market share.

Here we’d want to see that the company benchmarks well compared to established competitors. We’d want to see higher growth, for one. Or we’d want to see a more attractive value proposition and the ability to acquire users from established companies.

Another important factor is whether technology has enabled more efficient transactions in a previously fragmented marketplace. Both Uber and Airbnb have had such tremendous success because they’ve used technology to bring together huge numbers of buyers and sellers who wouldn’t have been able to find each other before.

Finally, the company also needs an understandable value proposition – something users gravitate towards and can see the value of right away.

Q: So what’s the difference between a big fish in a small pond and a big fish in a big pond?

A: Well, it’s natural to start out as a big fish in a small pond. This is often necessary in order to demonstrate product-market fit. Then the next step is to figure out what strategies for distribution and scale you need to execute in order to flood the pond, so to speak. That’s how you become a big fish in a big pond.

For a VC, the difference is proof that the market is actually large and addressable. Important metrics here are the value and frequency of transactions. Also, a high number of users, both consumers and producers, and a high lifetime value for each user.

Finally, you’d need to have a solid growth plan in place and be able to show a complete business case for why you’re company is unique and poised to dominate your market.

Want to read more? Check out part one of this conversation here.

Filed under: Platform Innovation | Topics: Airbnb, platforms, Uber, Venture Capital, Wikipedia