Claire Fauquier (Highland Capital Partners) - Purchase Behaviors of SMBs, Stretching Consumer and Sourcing at the Series A

Our guest today is Claire Fauquier a Principal at Highland Capital Partners. Highland Capital Partners is one of the oldest venture capital funds that invests primarily at Series A and focuses on the early growth stage. Some of their investments include Harry's, Rent the Runway, and Clearbanc. In this episode we explore some of the differences and milestones companies typically have at the seed and series A stages. explore the milestones at Series A for technology startups and the purchase behaviors of small-medium businesses.

One book that inspired Claire professionally is Radical Candor by Kim Scott. One book that inspired her personally is The Glass Castle by Jeannette Wells.

You can follow Claire on Twitter @clairefauquier. You can also follow Mike on Twitter @mikegelb. For all episodes, please visit theconsumervc.com. Thanks again for listening.

On this episode we discuss -

1. What attracted her to finance and venture capital? The differences in criteria from seed to series A? Diligence process at series A. What made her make the jump to Series A/B from Seed? What is hard about Series A/B investing? It seems like with the proliferation of seed-specific funds, it’s easier to track companies from earlier on. 
2. What are some mistakes she's made as an investor? Coronavirus is very top of mind. Has this impacted how she invests? Is she more focused on current portfolio companies rather than new investments? How does she think about deals broadly; if she had an investment philosophy, how would she characterize it?
3. In the consumer spectrum, what types of businesses is she focused on? What is her investment criteria for B2C businesses? What does she advise founders to focus on? How does Highland work with consumer businesses once they invest? What is one thing that she would change about Venture Capital?

Full transcript

Mike Gelb 1:08 So let's start out very early back in your career, what initially attracted you to finance and then specifically venture capital?

Claire Fauquier 1:19 Yeah, I kind of want to separate those two things, because I never felt like I was a finance person. And I think that in venture, we're lucky, because we're sort of not finance people. And I've told people that if I must be bucketed, into the finance world, I'm kind of in like, the fun finance. So. So yeah. So I got into investment banking, because I was a finance major, I was drawn to the numbers and the math and thinking about the economic implications of finance, which I felt was really interesting. But of course, when you're, you know, 2021 and deciding on what you want to do after school, there's sort of one career path for finance majors. And that's going into investment banking. So that's where I sort of delineate it and say that I don't ever really thought of myself as a finance person, I sort of just ended up in that career path thinking it would be a good launching pad. And it was I think I learned a lot. I think I learned a lot of what I didn't want as well. And then I moved on from that. What drew me to venture is totally different. For me, it's this real connection with how we're changing the world, how we're thinking about where the world is, in five to 10 years, and interacting with the people that are enabling that I think it's probably one of the absolute best jobs in the world when you feel like you were the dumbest person every day. And I mean that in a humble way. It is fascinating to talk to all these industry experts and people that are devoting their life to something that is really cool and highly relevant and tangible to what we're doing as consumers day to day and how we live our lives. And so it's sort of the story arc of being part of something that's bigger, I think that drew me to VC and less sort of the the aspects that I would attribute to Finance, if I can sort of answer that from a roundabout perspective for folks

Mike Gelb 3:03 that I know that entered in VC and kind of went, you know, worked a couple years in investment banking, similar sentiments I've heard is that you know, really grateful for my investment banking experience, learned a ton, but really happy. It's kind of over wanted to talk a bit about your experience first working in seed, and then how like the milestones change at the series A and Series B rounds, and what you're more focused on at Highland.

Claire Fauquier 3:30 Yeah, that's a good path to go down. And I think there's a lot of meat there. That probably changes at least from my perspective relatively often. But my most recent working theory, I think, is that seed investors are really fantastic when they can be sort of product oriented when they have a view on the entrepreneurial journey. And that is not to be taken lightly. I think that that skill set is incredibly valuable, and I'm incredibly envious of it having only spent a tiny, tiny portion of my career on the operating side, I think that once we get later and later, there's sort of this emphasis on evaluating business models and thinking about the sort of story arc and stage progression of a company rather than just being so focused on product. And so, for me, I felt like I almost didn't have the stomach for being a professional seed investor. And my investment banking background, as good as it was, I think, also made me much more apt to poke holes into things. And so that was sort of, you know, a bit of my mindset coming into things. And series A is fantastic for me, because the best part of this job in my perspective is working with founders, as I mentioned, and I think that series A you still get to spend all that great time working operationally with founders on some of the biggest challenges that they'll be facing going forward. But there's a little bit more of the business model to pull apart and to analyze and so it's sort of this perfect marriage of my background. Having said all that, Do some angel investing and I get to sort of keep my feet wet in that arena to really make bets on people that I think are exceptional. And and I get to sort of scratch that itch, which is a really nice little marriage, sort of an added side bonus that I love about series A that I hadn't fully wrapped my mind around is that just the way the portfolio construction work, seed investors are writing many, many, many more checks, right? at origin we wrote, you know, for per person, we wrote probably three to five more times the amount of checks that that we do now, or that I do now at series A and B. And so just based on that portfolio construction, you naturally can't be as close with all of your portfolio companies throughout the cycle of the company. And so there's this natural progression of sort of rolling off the board and and regular conversation with your companies that probably Series B or C or something like that. Whereas that a because you're you're making sort of more concentrated investments. You stay with that company up until exit and then That's really special to me, because I like creating that really deep bond with founders, I was felt it was kind of sad when the natural progression happened. And the company sort of graduated on to Series B, and C, and things just got so busy that all of a sudden our check ins went from, you know, every week to every two weeks, every month, two every quarter or something like that. So I like really being in the trenches with people. I think that's fun,

Mike Gelb 6:23 great point that you're saying about seeing investing in series A and that you don't write as many checks per year? Do you feel that at the series a stage you maybe have to become more specialized in terms of the actual industries itself, knowing those particular maybe business models or metrics?

Claire Fauquier 6:40 Yeah, that's a really good question and something that I struggle with, and I think that every VC probably thinks that pretty regularly. Yeah, I would imagine. I think there's pros and cons to specialization. I think the general thread though that you're getting at is that you need to be much more focused and much more thoughtful with your deal sourcing, I Rather than seed seed is very difficult in my mind to be thematic or to be doing any meaningful outbound sourcing, just because it is. So based on network and based on happenstance and who you might meet who leads you to somebody else. Versus at A and B, you can be a bit thematic, because you have generally companies that have been funded in previous rounds. So you get to sort of watch them as they progress up to your stage. And you can be a little bit picky in sort of who you reach out to and sort of go hunting, if that makes sense.

Mike Gelb 7:35 No, it does. It does. I wanted to also talk about, you know, maybe the current landscape at the series A and B. stages, seems like there's now this proliferation and has been for the past few years, how there's so much, you know, seed and seed specific funds. Just how are you thinking about series A and Series B as a as a general landscape.

Claire Fauquier 7:58 It's funny, you mentioned that in a minute. Hearing this correctly, your perception is that there's more seed funds than there are a and b fund. Right? Yes, yes. Yeah, I see it the opposite. Actually, I think there's very few dedicated seed funds versus series A and B funds. And I think on sheer number, there's a lot of early stage funds, because there's a lot of great emerging managers who are focused on earlier stage because they have smaller checks to write. But in terms of for the big behemoth funds, I think series A and B is much more of an established category. So it's interesting that you see it from a different perspective in my mind, but I when I think of funds that are purely see their institutional funds, you know, maybe on fund two or three, that are willing to lead rounds and really sit on the board and sort of play that institutional seed role, I don't think have a ton of fun. And I think origin is one of them, which sort of made us stood out which was exciting to really be a seed exclusive fund. But then I think once we get to series A and beyond, there's a lot of multi Stage funds, and there's much more capital floating around at the series A and B stage, which, in my opinion, at least makes it more competitive to a certain degree. Because there's less of a chance of finding a company that no one else has talked to.

Mike Gelb 9:15 Wow, it's really interesting how you're seeing it. This is probably where we should have started at the very beginning. But how do you think about series? A

Claire Fauquier 9:23 good question. I think the benchmarks and KPIs and all that stuff kind of fluctuate as time goes on. And as we, you know, move through economic cycles and stuff like that. But I think of series A and the second sort of true institutional round, they'll say so at origin, we thought about seed as the first institutional round. And so the company had maybe raised some Angel rounds or friends and family rounds or something like that. And this was the first time that they were really thinking about the, you know, transformation of the company into sort of a business where they're putting in place governance and a board and things like that. And, and pre the seed round, they were probably testing products had an MVP had early sales had some pilots in place or early sales with consumers etc seed a in my view was always to test out a couple hypotheses that were narrowing and narrowing in terms of true product market fit. And then at a, I think about it as sort of real product market fit where a especially consumer company has sort of the operating playbook in their minds where they know how to acquire customers with relative certainty. So the band of customer acquisition costs, for instance, starts to narrow and they have relative certainty that if they apply, you know, X amount of dollars to marketing, they'll get X amount of dollars in revenue. And they have a relatively good example of what their ideal customer looks like their supply chain, all those various things. And so for me, that really sort of indicates without thinking about, you know, the KPIs that can move, it's sort of that that true product market fit that we know the company He is ready to take that much larger round of capital and apply it to the business and have some idea of what the output then will be. That makes sense. So it's like a more of a stabilized CAC, I've talked to other investors too, and they say, like, at the series A, that's really when a company should really have product market fit. Yeah, I would agree with that. I don't think it means necessarily that the company has got everything figured out. You know, I think I think there's a lot of caveats that we and founders could throw on things that things can change quickly. And we all know that especially right now, right, like a lot of safer industries from an investment perspective have been thrown on their head during the COVID environment, but series A doesn't mean necessarily that the company is you know, off to the races, there's going to be operational challenges and I think a good investor can help with a lot of that stuff. But I think it does mean that once a company's raising series A they're not spending expensive venture dollars figuring out product market fit and figuring out who best to sell their product to this have an idea. Now it's time to really execute and pour that fuel on the fire. I wanted

Mike Gelb 12:05 to also talk about your like transition from a seed to a series A like what was maybe the toughest thing from changing from, you know, from origin seed investing to series, a investing,

Claire Fauquier 12:17 very quick kind of cop out answer is that the hardest part is, is giving up the relationships you have with your existing companies and relinquishing board duties. And so I still spend a lot of time with my portfolio companies from origin because it just simply