Venture is simple to understand, difficult to execute and easy to visualize. Asymmetrical outcomes look something like this:
Veeva’s contribution to market cap is currently a ~5,300x. This changes whichever way you cut it (when investors liquidated etc.), but the point stands that venture dollars invested is uncorrelated with the value generated. Past success is not an exact blueprint for future decision making. However, certain lessons can be learned.
First, at the time of Emergence’s Series A in Veeva, the number of pharmaceutical sales reps in the US was only 93,000, a decline from 102,000 in 2005. In the grand scale of venture thinking, this looked like a tiny market. Tiny markets are in opposition to the giant TAM’s most investors need to get excited. Emergence had little, if any, competition to win the deal and was able build a meaningful ownership position of 31%.
Second, because of this “tiny”, highly regulated market, Veeva itself had little-to-no competition. This has allowed it to build over 80% share of global life sciences sales reps. Without competition, Veeva had no incentive to raise further venture dollars to deploy into S&M.
Lastly, what kind of founder decides in 2007-2008 in the middle of economic collapse to leave their role as Head of Technology of Salesforce, to build a company in a tiny, unsexy and highly regulated industry? Only someone with delusional conviction, that speaks the language of his customers and without a predefined notion of what great startups should look like.
SUMMARY
Levante is a thesis-driven firm. We invest in outliers targeting specific, difficult to underwrite industries at the earliest-stages. We seek to be the first institutional partner to our founders.
Startups focusing on specific industries will be the future's largest, most efficient companies. Toast (NYSE: TOST, $13B market cap), Veeva (NYSE: VEEV, $37B market cap) and Procore (NYSE: PCOR, $11B market cap) need no introduction. On average, vertical companies exit for $1.5B after raising $118M: ~13x.
However, venture-scale exits in niche markets have lagged behind the rest in terms of scale. This explains why, historically, 70% of these companies that exited failed to raise a Pre-Seed round, with the first institutional rounds coming at Series A or B. They didn’t move the needle for early-stage VCs, who themselves have grown AUM so much that they need to swing for the largest imaginable markets. Not only this, but the vertical SaaS model has largely failed to capture meaningful portions of end-customer GMV in the long-tail of industries.
Levante believes three shifts will change this:
- New models of distribution like full-stack companies that touch the end customer, roll-ups that enable faster integrations and franchising that allows workers to become owners.
- The ability to either get high market share quickly leading to: pricing power, higher attach rates and minimal logo churn or bring new markets online (think BPOs, call centers, services).
- Taking advantage of advancements in automation and robotics that will unlock higher share of transactional volumes.
The total market capitalization of vertical companies has grown 13-fold from $25B in 2011 to $325B in 2023. The next $1T of additional enterprise value over ten years won’t be built through vertical SaaS, it will be through new business models targeting specific industries. Our mission is to be the first call founders make when they’re looking to build an industry-defining company.
APPROACH
Our approach is centered on building theses around sneaky-large markets that other investors believe are too small. When we believe there’s a distribution advantage that can drive fast market share, a wedge that can capture high share of transactions, coupled with a non-linear founder that speaks the language of their customers, we’ll invest.
This approach allows us to move fast in diligence, come prepared to founders and invest behind a concentrated group of exceptional people. We typically conduct tens of customer, competitor and industry expert calls before reaching out to founders cold and presenting our work. We then connect those experts with our founders to observe how they respond to their criticisms and how they filter information.
Our thesis on the need for a next-generation POS for liquor stores was built prior to and alongside Levante being connected with Jake Bolling of Scotch Networks. Levante spoke to players like Bevz, Santé and HeyTipple. We called an LP who sits on the board of EnCompass, got on the phone with the founder of Drizly and the first investors in Provi. We conducted primary market research across NAIC code and state census databases and did our own secret-shopper store drop-ins.
Levante presented this work with the founder, created a shared Notion to collaborate as we navigated the idea maze together and helped Jake build conviction in the space. After visiting in Denver and spending the day together, Levante introduced him to Anthony Fusco who previously led hardware operations at Toast, Emily Bartels who led payments at Mindbody and Angus Davis who built and sold UpServe to Lightspeed. Levante led the Pre-Seed round for 12% ownership and a board seat.
We invest in areas where venture dollars are scarce, where initial market-size risk is high but almost zero if the founders have a clear path to extend through the industry’s profit pools, and by definition where multi-stage firms are not structurally positioned to deploy large amounts of capital.
FOUNDERS
Talent Density
In some ways, underwriting vertical specific markets looks similar to deep tech. The cost and complexity of developing a product has come a long way since Toast had to raise $960M to build restaurant-specific POS systems and a nationwide field sales team. We’re also past the point where the Enverus took 22 years to exit because of long implementation cycles that expanded the gap between CARR and live ARR.
Today, talent pools are emerging from past cohorts of industry-specific companies where deep industry relationships were built. We’re seeing more founders either sell, quit or step down from overfunded and overhyped vertical companies from the last five-to-ten years. A handful are taking those learnings and building new businesses with a new-found skepticism of VC money. Both of Levante’s portfolio founders wanted to self-fund and were hesitant to take on funding.
Skupos sold sell-through data from C-Stores to the largest CPG and distribution companies in the US, but the core product lacked the monetization levers to scale past $30M in ARR. Jake’s new company, Scotch, takes those relationships with distributors and is building his GTM motion around exclusive channel partnerships with them.
Ryan Smith’s last company, LeafLink, captured 50% market share in wholesale cannabis and 9,000 retailers. But 50% of those retailers never used the software they were sold: implementation and onboarding tech-resistant SMB operators is a problem most VMS startups face, with Veeva still employing a 70+ team to close the gap between contracted and live ARR. With Mura, advancements in LLMs and automation mean Ryan can sell virtualized labor, not another software seat. The efficiency gain ROI for his customers is immediate, which increases willingness to pay and puts Mura in a position to charge annual contracts upfront. That’s real cash coming into the business before the product is even deployed.
Underwriting Founders
Great companies require great talent. VC’s and LP’s who are skeptical of Levante’s strategy bring up a great point: why would exceptional founders and early employees build in “small” boring markets? Will liquor store POS or back-office software for cleaning companies really attract the greatest entrepreneurs?
Great founders are difficult to pattern match, but the temptation is there and the cycles are unavoidable. If Mark Zuckerberg drops out of Harvard to start Facebook, more college drop outs are quickly hunted and systemized. When Elon and Palmer Lucky made hardware and defense cool again, the narrative shifts to “American Dynamism.”
There are certainly major tailwinds that justify VC dollars in these shifts and founder archetypes. Levante is however endlessly fascinated by people that swim against currents, exploring areas that others dismiss and areas the “batting average” of VC’s I need to compete with is lower.
Today our conviction is that the areas that attract non-linear talent have diverged to form a barbell landscape. On one end you have founders on ambitious, capital intensive and humanity-critical missions. Space exploration, military hardware and vertically integrated manufacturing are attracting exceptional young people who build in broad anticipation of future problem sets. On the other end of the scale you have founders who are obsessed with solving the specific problem sets of today to totally dominate and reshape existing industries. These tend to be seemingly small markets with execution risk, which leads to dislocated pricing at the Pre-Seed and Seed stage.
These founders tend to live outside of the VC and startup hubs of the coast, a little older and deeply ingrained in their specific industry, breaking the narrative of the 20-something college drop-out. That doesn’t mean Levante uses a checkbox. The story of Jake Bolling the founder of Levante’s first investment, Scotch, is one of leaving Denver for China after university to build prefabricated homes on oil drilling sites, coming back to acquire a defunct gas canister business which he scaled to 5,000 locations and then starting a convenience store POS company which he scaled to market leadership and a nine-figure exit.
Jake has the ambition, unfair industry insider position and non-linear journey as the ingredients to quietly build a generational company in the alcohol industry. Starting with liquor stores means most other investors find it difficult to get excited this early when they could be investing in the next space startup with a clear path to fast markup. This opens the door for Levante to lead with conviction and high ownership. The highly-specific nature of Jake’s business and his own disdain of mediocracy means Scotch’s talent pool is narrowed down to customer obsessed weirdos who you know for sure they aren’t in this for short-term glory and status.
The mistake we believe most VC’s are making is viewing vertical market startups as a playbook that can be replicated. There’s countless blog posts that describe frameworks from Tidemark’s “Vertical SaaS Knowledge Project” to Fractal’s “Vertical SaaS FinTech Playbook.” The assumption is that you can take any niche vertical, apply a system of record SaaS then expand ACV’s through embedded fintech. In Mura’s niche of commercial cleaning, we’ve seen ex-Meta engineers backed by Index building timekeeping software for frontline workers.
On paper this sounds great. In practice, we’re skeptical that Menlo Park natives who managed teams at a mature tech company speak the language of blue-collar workers that don’t care about another software tool. Time-fraud is a real problem for cleaning companies who pay W-2 workers by the hour. Convincing those workers to log their own hours in a mobile app so they get paid less is an uphill battle. Just look at Cents, who entered the laundromat space with the makes-perfect-sense thesis that laundromats should be accepting digital and card payments. The reality? Laundromats take cash for a reason…
Ugly markets require ugly solutions. Ugly solutions require founders that have lived ugly experiences. Jake and Kevin at Scotch sold POS software to c-stores during an armed robbery. Ryan built and shipped product to cannabis retailers. True value is created through both understanding and leveraging how the real world works.
FUND FAQ
FUND MODEL
Levante is targeting a $20M fund. This will be our first fund. We completed a first close in Q2’23.
HOW WE INVEST
$800K - $1M is our sweet spot for investment check sizes. We make 4-5 investments per year and expect ~20 companies out of this fund.
.jpg?id=eefc2897-6f20-4a90-bd51-d72b22075ce7&table=block)
HOW WE THINK ABOUT RESERVES
We have no reserves for our first fund. We will offer our pro rata rights, when we have them, directly to our LPs and will put together SPVs to follow into our companies.
HOW WE MAKE DECISIONS
We make our own high-conviction decisions. We won’t ask founders who else is investing, and we don’t care if we’re the only investor on the cap table. In fact, aside from industry angel investors and operators, we’d prefer it.
Levante is a solo GP fund. There are no investment committees or broader team meetings founders need to take.
HOW LONG OUR DILIGENCE PROCESS TAKES
This depends on the complexity of the vertical and the company. On average, Levante spends three months pre-founder outreach working on a thesis. We aim to go from first meeting to final decision in ~2-weeks for companies we’ve spent time building conviction on.
For opportunistic deals outside of our normal process, it can take one-to-two months. This is intentional. And it’s better for founders. We’re not trigger happy, and knowing our founders and companies deeply increases Levante’s ability to write a high-conviction, meaningful check instead of an optionality ticket.
HOW WE HELP
Founders are sick of VC’s promising a lot, and underdelivering. Levante is not a platform fund. We don’t have an operations team. We haven’t built any magical tools to turn our companies into unicorns.
We believe in taking venture back to the basics and being an extension of the team. Given Levante invests so infrequently, we have the time to get in the trenches with founders on whatever they need. Customer calls, hiring, cold-outreach to partners or advisors. We’ll fly out to founders and work in their office. Today my focus is on sourcing early hires for Scotch and Mura, and I’ve been mining my network and cold emailing candidates to setup first interviews. I then send my call notes to the team and introduce the ones they’re interested in.
In the end, the best founders won’t really need us to help them build a great company. As the founder of my prior firm, Hummingbird, used to say “our founders are able to filter out 95% of the advice they’re given.” What they really want is an investor who is going to match their intensity, their need to win and their life-or-death mentality.
That’s been lost with multi-stage, multi-asset firms backing 50+ seed deals a year with 80% of their AUM in their top five companies. When founders meet Levante, they know this is it for us. We have no other option.