Opening Back Up…

June, 2021

The world of technology changed over the past 18 months. We knew that change was coming, and like so many others, attempted to map that change at its onset. We were right about some things, and surprised by others. As President Biden declares the US open again, let’s briefly look back so that we can look even farther forward.

The ubiquity of low cost/ high compute devices and cloud and mobile computing platforms had arrived prior to the pandemic but the need for remote, reliable, intelligent and secure access to everything from healthcare delivery, education, work, and entertainment catalyzed a multi-year leap ahead in pace of adoption and usage of cloud software platforms for both the consumer and the enterprise.

Tech is no longer its own sector; it is the backbone of every business being created and recreated today.

This is true for tech driven startups as well as big tech. Does Clubhouse, whose private valuation soared to $4BN in the year since its launch fit neatly into the category of “consumer app”? We don’t think so, because the company provides a platform on which to build content, audience and a business to content creators. Does the popular messaging app Telegram fit neatly into the category “consumer communications tool”? Its user interface and functionality allowed bots to scrape vaccination websites by geography to advance government and health service providers’ goal of getting the population vaccinated faster. These platforms have expanded well beyond the “consumer” box to become important applications to business and government.

As we continue to open up as an economy and a society, we reflect on what we thought might happen and what we think is next..

What we got right
Early on, we noted the increased usage of cloud and mobile computing platforms creating new business opportunities across nearly all sectors. Satya Nadella offered a prescient comment on MSFT’s Q12020 earnings call that “We have seen 2 years’ worth of digital transformation in 2 months.” At that pace, we’ve leapfrogged a decade, the largest value unlocks being in:

• Cloud and mobile based infrastructure enabled innovation in: retail, e-commerce, remote learning, healthcare, and hybrid-enterprise enablement. Snowflake, Twilio, Mulesoft and Salesforce are just a few examples of cloud and mobile infrastructure businesses transforming large segments of the economy. Cloud collaboration applications, intelligent technologies and productivity and workflow automation tools existed prior to the pandemic (Zoom, Slack, Google Workspace, Gitlab, Airtable and Salesforce) but saw massive usage acceleration by workforces globally, driven by hybrid / remote work requirements. This adoption is allowing organizations to evaluate and adapt to more permanent policies that allow workforces to be hybrid/flex (e.g. Salesforce, which had it’s best first quarter ever in March 2021 will remain hybrid/flex through YE 2021). Cloud software is now a variable cost for businesses and new business creation. It is driving innovation across all sectors
• The rise of the ‘solo-entrepreneur’ — Vertical SaaS and mobile enabled solutions now allow individual business owners and very small scale companies to operate with information systems, data, and marketing tools that were historically too expensive to access. This is especially true for businesses that serve traditionally overlooked sectors: e.g. mental health (Lyra), family care (Papa), creatives (Patreon). It is also true of solutions that serve overlooked communities (e.g. women, communities of color, LGBT+, etc.) We are seeing a furious pace of innovation and business creation leveraging tools that make it faster and much less expensive to develop software solutions that often disintermediate a broker (creative economy) to improve specific end user needs and create more value for all market participants
• The pandemic has thrown into stark relief the sclerotic and antiquated nature of government (state, local and federal) technology — from operating to supply chain and procurement systems to research and innovation capabilities. Conversely, it served to highlight new opportunities, especially with the Biden infrastructure bill’s focus on home healthcare workers, climate and the environment, supply chain renewal, advanced manufacturing and breakthrough technologies. Leadout is proud to be strong backers of CoProcure in the govtech space

What we didn’t predict…

• Remote Company Funding: we thought that new investments might slow as we and the broader investment community retrenched and helped portfolio companies reevaluate burn, access to private capital, and whether to apply for PPP loans. “How would the Winter Cohort of YC’s Demo Day even work?” will investors — having never met a founding management team and really “kicked the tires” in the traditional sense — wire capital after video chats and phone calls only? Turns out the answer is ‘yes’. In fact, the increased ability to build businesses remotely seems to have accelerated new business formation
• We believe these are exciting tailwinds for our Founder Market Fit thesis as more entrepreneurs have access to the tools and talent necessary to build successful companies from anywhere and by anyone
• More than 50% of our portfolio is outside of the Bay Area. We met many of our founders over Zoom and we look forward to meeting in person as things open back up
• We grew as a firm during the pandemic: Steve Brownlie and Yun-Fang Yuan started spending a LOT of time with me on Zoom in early 2021. I’ve known both of them for a long time, but we haven’t seen each other in person since becoming Leadout colleagues — that hasn’t stopped us meeting hundreds of companies together
• The pace of vaccine development. We did not predict that the discovery of the vaccine would take 18–36 mos (we thought longer). Rapid mobilization of clinical trials and scientific collaboration on a global scale drove unprecedented innovation and accomplishment in the public health realm. #WeLoveScience
• The Resilience of Residential Real Estate — as evidenced by Compass and AirBnb IPOs. New Housing Starts were up — remote work has impacted demand and preferences for housing. And as cities like New York and San Francisco come back, inventories are currently at an all time low
• Stagnation in who gets funded — We believed female founders would continue to make progress raising institutional capital for early stage startups but the data suggests otherwise. Investment in female led fund managers declined as did investment in female founded companies. The data is even worse for underrepresented (e.g. Black, LatinX) founding teams. There is still much work to be done. In Q1 2021, 83.9% of venture dollars went to all male founding teams. LatinX founders received ~2% of dollars and Black founders received less than 1%.The need and opportunities for funds that focus on these groups continues to be great.

What we’re thinking about now
Despite headwinds in the capital markets for female founding teams, the pandemic catalyzed a massive potential value unlock for non-obvious founders because it has meant that anyone from anywhere can start a business enabled by tech to serve large and overlooked markets. Remote work in a sense leveled or began a flattening of the playing field. With this expansion of tools and technology, we believe there will be growth in the opportunity set of great companies emerging outside of the historical centers of venture capital activity.

New and revitalized tech communities exist in places like Miami and Tampa (our portfolio company, BlockSpaces is HQ’d here), Tulsa, Nashville not to mention LATAM (we’ve heard from amazing founders in Mexico, Brazil, Columbia, Argentina and Chile). This represents an incredible opportunity for greater inclusivity in the technology ecosystem as the historical tech centers are also extremely high cost-of-living locations that can be difficult for aspiring entrepreneurs and tech workers with fewer economic resources.

Founder Market Fit leads to Product Market Fit. At Leadout, we believe that the founders with deep customer segment expertise will be the ones to imagine and redefine their industries and our culture: from how we form our communities, exercise, and relieve physical and mental pain to how we pay each other for goods and services and build a culture of sustainability for future generations. We believe founders who bring empathy, inclusivity and authentic leadership to building their businesses will win in this next era of innovation.

Finally, we are thinking a lot about the environment. We want to see the Venture Capital environment drive value creation for all stakeholders: investors, employees, customers and communities. We would like to see the broader business community give greater priority to the physical environment (climate and atmosphere), the cultural environment (diverse perspectives and equal pay), and the communities in which we live, work and serve. There is evidence to suggest that the hybrid work environments thrust upon us by the pandemic could actually enable greater inclusivity and diversity.

Leadout will continue to be super explicit that building organizations that embrace diverse perspectives is a competitive advantage. By doing so, we break down barriers to great ideas and talent finding capital. My experience since starting Leadout in 2018 reinforces the value in this opportunity. Founders have been finding us! They want to work with us because we make clear that we want to work with them as they are.

Happy Pride Month! 🏳️‍🌈
June is LGBT+ Pride Month, a month in which we celebrate personal visibility, human dignity, and self worth. Pride recalls the liberation movement kicked off by the Stonewall Inn uprising in June 1969 that forced into the spotlight our nation and society’s commitment to justice and equality for all of us. With humility and empathy, I started Leadout Capital as a solo, female, LGBT+ GP to find, support and help to change the outcome for the underdogs, and the under-represented entrepreneurs who aren’t necessarily given the visibility they deserve. I want to thank several organizations in our ecosystem such as StartOut and Lesbians Who Tech for their work in creating more opportunity, fairness and equality for the LBTQ+ community.

Here’s what’s been happening in the Leadout portfolio:

New Investments

BlockSpaces The BlockSpaces Platform connects business applications to enterprise blockchain networks through fully managed infrastructure and configurable drag and drop workflows using either a graphical or a code based interface. BlockSpaces is located in Tampa and led by its founders: Rosa Shores, CEO, and Gabe Higgins, Chief Blockchain Officer. Here is coverage / news about the round we led.

Reserve Trust enables customers to securely move and store assets using the Federal Reserve wire and ACH systems. The company offers API based payment services and account creation. The financing was led by QED Investors and the company is headquartered in Colorado.

Kraftful provides user interface and user experience (UI / UX) management for Internet of Things (IoT) device apps. The company provides IoT manufacturers with an end to end solution, including design and creation of the user app, cloud management and maintenance, and user experience and customer satisfaction management. The company is located in the San Francisco Bay area and led by founder and CEO Yana Welinder.

Makomi provides training, tech and operations solutions for property managers to successfully launch and scale their businesses. The rise of companies like AirBnB and VRBO have driven a boom in rental properties and owners are increasingly realizing they require professional management services and there are insufficient providers of these services in the market today. The company is headquartered in Philadelphia and led by founder and CEO, Jesse Gross.

Stealth Leadout made one additional investment that will be announced later in the year.

Portco Highlights and Mentions:
R-Zero Congrats to the R-Zero team on their incredible momentum over the last year and their $45.1M Series B raise, led by World Innovation Partners. R-Zero is building the world’s first continuous, automated, disinfection ecosystem to protect indoor environments. We are proud to have such an innovative company in the Leadout Capital portfolio successfully charting a pathway to a safer society by solving a critical, universal need for health security. Press:https://www.reuters.com/article/health-startup-rzero/r-zero-startup-automating-disinfecting-born-during-pandemic-raises-415-mln-idUSL2N2NX2LK

theCut Spring has been a great season for theCut with the world opening up and people wanting haircuts. Over 2.5M users downloaded the app with half a million clients actively booking appointments every month. The team launched Web Booking for barbers to create personalized web landing pages for new and existing clients to book. They also launched Barber Home a mobile feature for barbers grow and monitor their business.

Near Space Labs has successfully won several large enterprise contracts for its earth imagery services. The company was featured on America by Design on June 19 (CBS and ABC). Check out the video preview here

Tierra continues to add enterprise customers for its [crime risk assessment system] in Mexico. The company is receiving pull from its customers to expand into additional markets in both North and South America.

The team in MX, pre-pandemic (c. early 2020)

CoProcure — recently launched an updated version (see image, below) of their free cooperative contract search tool that allows local governments to confirm contract scope and access documents faster (try “safety vests,” “lawnmower” or “Microsoft Office”).

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Thank you to Jessi Hempel, Shane Reilly, and Kevin Salwen for your feedback and input.