ScaleView + Euclid Ventures: A conversation with Omar El-Ayat

ScaleView founder, Gabe Wilcox, sits down with Omar El-Ayat from Euclid Ventures. Watch the video to learn more about Omar’s experience, Euclid Ventures, and tips on what Venture Capital firms look for in founders.

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Gabe Wilcox: Here from ScaleView Partners, the investment bank, for founders by founders chatting today with Omar El-Ayat from Euclid VC. Omar, how are you doing? 

Omar El-Ayat: Good, good. Thanks for having me. 

Gabe Wilcox: Yeah, it’s a pleasure. Well, why don’t we kick off, let you sort of introduce yourself and your fund. Tell us about Euclid, it’s a new fund, which is exciting.

Omar El-Ayat: Yeah, so I’m one of the two co-founders of Euclid Ventures. We’re a little over a year old now. Our focus is we’re the precede fund for vertical innovators. So what that means, in essence, is we partner with founders as early as the formation stage. Building purpose-built software, transforming what we see as sort of the cornerstone industries in the economy. 

My partner and I have been investing in vertical software and the “real” economy for almost 20 years. And I think our realizations in starting Euclid were a handful of the opportunities are really still in its infancy. And despite the many successes, both large exits and public markets, there remains an overwhelming funding gap for these sorts of businesses at the early stage. And so we funded Euclid with that in mind. We’ve been investing now since the start of the year.

Gabe Wilcox: Awesome. Very, very exciting stuff. There’s a couple things there that I want to dig in on that I think are pretty interesting. Let’s talk about the “real” economy or like real industry. What is that? What do you mean by that?

Omar El-Ayat: I think my partner would cringe on that term. We prefer the sort of foundational industries or, or cornerstone industry, the economy. So think of things that are sort of non-knowledge work or non-tech industries generally that really make up 60-65% of US GDP. They generally have incredibly low tech penetration, so often kind of very low single digits. I think areas like manufacturing, energy, agriculture, food service, retail. Anecdotally, we had believed this funny gap to exist. We went out and kind of ran the analysis and our estimation is it’s 65% of the economy and only receiving about 11 or 12% of venture funding over the last three years.

So, in our mind, it’s like the decade old saying, now a software in the world, those things should really converge, right? It’s software. And purpose-built software really should match the reality of the economy.

And it’s lagging far behind and our belief is partially that it’s due to poor early-stage infrastructure for the right sorts of founders building in these markets. We’re hopefully that we can partner with some of the best in and build wonderful businesses. 

Gabe Wilcox: Very cool. It sounds like a massive opportunity.

So let’s look at the vertical side. As you know, prior to SscaleView, we were involved in a vertical SaaS energy company. So I would echo a lot of what you said about poor adoption of technology, big opportunity, massive industries. That resonates with me.

From a founder’s perspective, what are some of the challenges from a big market, low tech perspective? Who are the founders who tend to be really successful here?

Omar El-Ayat: I think another really important element of why we believe there’s some sort of the funding gap. It comes down to what the first wave of vertical software really looks like. These large kinds of monolithic horizontal systems where you put a GUI and you made it vertical specific. And some of them are wonderful, and so I don’t mean to be pejorative, but that was sort of the first wave, like ERP, CRM, all of that sort of stuff, getting, effectively audited for, for vertical markets. And there’s some really great winners there. Our view is that part of the reason adoption is so low is many of these industries. And your business is a great example, it has a highly, highly specialized kind of processes, workflows, sub-verticals that you can’t just skin something, right? These need to be designed from the ground up. This is why we use the word purpose built. That is our belief that adoption is not due to a distaste for technology, but simply the technology is not designed for the users.

The two tenants of that really are again, purpose built and specialization. We are really biased to founders that have kind of a deep insight and a connectivity to that market.

So that could look like relationships with stakeholders. Often it’s kind of a painful motion. Like they’ve hit their head against a computer or computer monitor or their clipboard for so many years feeling this pain and really understand and have empathy for the stakeholders.

But it’s a really hard specialized problem and there are certainly exceptions where people can kind of parachute in and learn, but our bias especially being as early as we are. We want to fund sort of turning insight into product market fit versus funding, kind of that customer development, market development stuff, which is valuable, but it’s not sort of what we specialize in.

Gabe Wilcox: When you think about this new wave of model that, that you think makes a lot of sense as opposed to the sort of the first generic product. Is there a shift in business model as well that might come with that? Is it something different from traditional SaaS, sort of flat per seed or per user that you might see in a horizontal kind of application?

Omar El-Ayat: Yeah, I certainly think so. And I’d be curious to get your take on this as well, but I think this is another part of why we believe that tech adoption can be so low is that tech budgets increase incrementally, right? They increase my orders of magnitude. So I think one of the challenges that a lot of vertical software companies can face is trying to push a boulder up a hill where you’re trying to create a budget. You’re trying to transform a process digitally. You’re trying to create a budget and you’re trying to drive behavioral change. And to us, that’s like a losing proposition. And so our bias is really much on, attach yourself to the value chain of that industry.

I’ll give you a great example. My partner was one of their early investors in Transfix. It’s a digital freight broker. There’s a number of them, Uber, Freight. Convoy. They are effectively a service fee, a brokerage fee attached to the cost of freight. Brokerage fees have existed in freight since the dawn of time. So it’s a software business, but it’s a transactional software business. Embedded into an existing value chain and business model.

Our belief is that the easiest way to integrate yourself is you’re not trying to transform or create a budget. You’re integrating into the budget and later on you can obviously add additional products and services. But for that initial point, you want to reduce as much friction because the friction really is in adoption, right? How do I drive behavior change if you’re adding business model friction as well? I think that’s a really, really hard thing to get right.

Gabe Wilcox: Yeah, it makes a lot of sense. And I think it also goes back around to reinforcing your bet on real specialized knowledge. It’s somebody who knows the industry well because that’s a real trick in itself, right?

To figure out how to get paid as a software company or a technology company in a way that your customers are used to paying for some value prop, right? Not just kind of coming in from the outside and saying, here’s my model. It looks just like Salesforce. If it’s an industry that’s not used to paying, they’re not used to buying that product.

Omar El-Ayat: Also it’s a model that became popular in consumer business. Think about Uber, like ultimately you are paying for a software even if you don’t realize it, right? And so, there is a value to the service, it’s just how do you attach yourself to that value versus trying to drive incremental revenue where it doesn’t really make sense.

Demystifying The Early-Stage Funding Process

Gabe Wilcox:  Let’s talk a little bit about the early-stage funding process itself. And the goal here is to demystify this a little bit for founders. So you sit on the investor side of the table. You probably listen to countless pitches from various companies. What do you look for in a founder? We talked a little bit about the kind of the company and the business model. What do you look for in a founder, in a founding team when you make an investment? So that maybe some of our audience out there gets a peak behind the curtain on some of these pitches.

Omar El-Ayat: I’ll tie this also to the funding gap and why we think it exists, but I think this is a really important element of the highly specialized vertical software businesses, if you’re not gonna be pitching to somebody who is, is generally gonna be an expert, right? Even if there, you’re going to a vertical fund. There are hundreds and hundreds of specialized sub-verticals within that. And so what we try to do ultimately is we are underwriting a couple kinds of characteristics we’re looking for. 

You know that real deep founder market fit, right? Not just for the resume, but like why is this the right funding and founding team to build this business around? We then underwrite, what is the insight into this large potential market that can support a big business? And so I think it’s, it’s an important nuance, but like we’re not underwriting a product. We’re not underwriting technology. We’re truly underwriting an approach. And I think it allows us to hop into markets that we don’t fully know because we can follow a common set of characteristics in how we kind of evaluate the potential for that behavior gen we talk about.

From the founder perspective, I think ultimately in these businesses it’s really important to center yourself on that element. Which is like, you know that you are this individual, he or she has a scarce asset. And we talk about that a lot and kind of how we think about sourcing is like there are very few people in the world that have your expertise and you are able to then obviously you’ve been successful. You have some track record, you understand software, and that’s the scarce asset, right?

And you lead and pitch with that, not the market. Anyone can pitch the market, right? But it’s really led with the scarcity, which we believe is those specialized founders and then kind of you can weave in the rest of the story. But to us it’s, especially at the really early-stage, having that anchor around with that story.

Gabe Wilcox: I’ve heard the advice before, in a bunch of different ways that specificity is what you want. Just if you think about your career or what should I do, just keep getting more and more narrow to your advantage until you’re sort of one of the best in the world at it.

And it can be a really, really narrow thing. But that’s, I think what I’m hearing, when you combine that with hopefully a pretty big market to go after, then that specific knowledge and expertise is the first thing you look for. 

4 Market Insights

What about the second thing you said there that was interesting was about insight? It’s not a product, it’s an insight about a market. Are there some common ones across industries? An insight or approach that you could look at a bunch of these big markets and say, well here, here’s a way that people are using software to eat it.

Omar El-Ayat: We’ve probably have, even in our year, a year or so of existence, we probably have looked at, I don’t know, 500 markets, right? Maybe it’s a little bit hyperbole, but like you need some sort of common thematic approach. And so we sort of look at them as four pillars of what we look for. And the reality is they have kind of sub pillars, but really we think they apply to almost every vertical market.

And sort of the first core one for us is broadly this idea of digitizing the supply chain. And so what we mean by that is  not necessarily the trucks and the boats and all of that stuff. But literally thinking about procurement, vendor management, all of the very, very specialized things that happen within a sub-vertical.

So, for example, our second investment is in food service, right? They’re helping restaurants manage their spending, their budget, and they’re purchasing between them and distributors, right? It’s a very, very special supply chain issue. Obviously we’re not moving anything. We don’t touch trucks, we don’t touch logistics. But we sort of think that like across every market that sort of procurement payment vendor management value chain is gonna be disrupted or is gonna be transformed by software. 

The other really big pillar for us is financial services. And again, I’ll caveat, but when we say that we’re not talking about traditional banking or lending or horizontal products. We’re talking about literally the financial infrastructure and backbone of businesses. So, for example, one of our first investments is in heavy construction equipment and they’re trying to build an effective brokerage and equipment lending business in construction.

And it’s a great example of an industry that’s existed. But as for all of the innovation and all of the capital that’s gone into the consumer side of the business, a lot of B2B lending is really, really arcane, so, we think that, like desktop characteristics really kind of permeate across many, many markets, and so a lot of like processes. If you dig a little bit deeper, it’s some kind of a financing problem behind it.

Gabe Wilcox: That’s actually the issue–the financing or the lending or the transaction. 

Omar El-Ayat: When I started out in Venture, I funded a lot of consumer lending consumer products. There used to be this, and I think now kind of disproven idea, that you can innovate in underwriting. I think over time everyone actually underwrites the same in businesses. That’s absolutely not true. There’s a business I back that’s done quite well and literally all they do is like, does this company exist?  I mean, I’m simplifying it, but they have some of the largest FIS as customers and that is the quality of data. It’s a hard data problem, right? You have hundreds, if not millions, of small businesses across the United States. There is no aggregated source, there’s no credit score. It is a really, really hard problem. And I think it kind of speaks to why we believe it has to be specialized because there’s really no aggregated data source. There’s no credit score. These have to be built bespoke, so we think about figuring out how to reimagine the financial infrastructure of these industries.

The third and fourth I think are probably a little bit more straightforward. The third one is the connecting infrastructure for a vertical market. This is more of a kind of a tech heavy thing. Think of sort of a lot of the API businesses that you see a lot of sort of like data connectivity, so enabling sort of the connective infrastructure and that’ll enable a lot of economic winners. So it’s kind of betting on the infrastructure for the markets.

And the last one, I’ll caveat by saying,when we think of productivity, we’re not obviously investing in Slack or things like that, right? It’s less so about work for productivity and like a lot of very, very important specialized business processes. I’ll give you an example. One of my prior investments that exited Autodesk was building connected. They were a pre-construction software business, so they helped GCs bid out work to thousands of subs when they get an RFP for a multi-billion dollar commercial project. And before building connected, I mean, we’re talking about FTP servers and email, half the people wouldn’t get it. And it was incredible that they’re building a Salesforce tower and half the people that could bid on it aren’t getting the email. It was sort of a really, really arching thing. And so that’s sort of like, again, it’s productivity, it’s sort of collaboration, but it’s a very, very specialized thing in a very, very large and important. 

Gabe Wilcox: Got it. So that feels to me a little bit like the non pejorative sort of place you started with the first generation. In some ways that’s a little closer, right? It’s about a very specialized workflow that is just, well, customizing a Salesforce instance to do this. The workflow is specific and you bake that in with some collaboration and project management and you’ve got a big winner.

Omar El-Ayat: A hundred percent. It actually speaks a lot to the idea of centralized CRMs in a lot of vertical markets. My partner and I joke that basically every one of our best businesses are ever gonna back into becoming a CRM or a payments business.

And if you think about building connected, it really ultimately, even if there wasn’t an actual CRM at its core, had a lot of CRM functionality, right?And eventually, the comp that was, obviously before their exit, they had kind of the larger ambition in goals and they built a CRM for subs.

But I think you, you’ll, you see that time and time again where you start with a highly specialized workflow. It has some sort of element of sales or contact management or something where there is a unit of contacts. The beautiful thing about it is like you create CRMs sort of like absolve from view, right?

And so eventually you can be like, oh, by the way, you have a CRM here, and then you can kind of sell it. So it’s important, it’s a good point you bring up and I think you’ll see a lot of companies back into CRMs, but like, I think the top level CRM thing is, is a really hard thing to do. But these businesses are hopping their way into it. 

Should Your Company Exist?

Gabe Wilcox: Let’s go back to the third theme–infrastructure. That is pretty high tech, maybe API sort of connecting systems to each other. It strikes me that that might be a big deal in a vertical specific approach because different verticals have different embedded esoteric, like maybe legacy systems. Is there some legacy software system perhaps that runs the world in this industry that your average person outside that industry doesn’t know anything about? Or, or tell me a little more about the problem there.

Omar El-Ayat: If I look at my career, I think this has been the hardest and probably the most painful lessons learned in this area. Because I think what you’re describing are a lot of the characteristics that companies realize, which is like, because just because something should exist doesn’t mean it will exist. And I think because of the often monopolistic kind of data aggregators or centralized forces are what you need to work around them.

The things that we look for here ultimately center around the viability, which is like, can you build sort of a good enough product?

You need to sort of be able to work around the infrastructure, hack together and get enough product, build enough adoption, get market share, get market positioning, power, aggregate data, and then build off of that.

It’s really hard, like they are, I think for us it’s like they are the biggest problems, but they’re also the hardest problems, right? I think that the exciting thing in a similar way, once these applications get built, the economies can be built on top of them, right?

Stripe is another great example of that. There are massive, massive opportunities. I think for us it’s the area we’re most cautious because you don’t want to be stuck. Our internal joke that no one else would find funny is about integration hell. You basically become sort of a middleware provider and like that’s a really hard place to be as a young company.

Gabe Wilcox: Just because it should exist doesn’t mean it will. Just because you have a product that’s so much more modern and easy to use and nice for the users. That’s not a guarantee that you’ll ever get through it or procurement or even to the users directly. 

How Do You Buy Into These Ideas?

And so what are some strategies? Because it is something that comes with, oh, hey, I’m gonna go bring tech into this big outdated industry and it’s a massive opera. It all sounds good, but where the rubber meets the road sometimes is. There’s a reason they’re slow tech adopters. It’s a really tough sale.

You saw there’s sort of the product led growth approach where you do something where you’re able to go bottoms up and get users interested and engaged and then get into the organization. It’s definitionally a part of selling into these. How do you do it? 

Omar El-Ayat: You remind me of a mentor early in my career who was a really successful consumer investor and, and one of his core axioms was like, he would never invest in anything for himself, right?

Because he thinks there’s just this inherent bias of evaluating anything kind of with the lens of like, Oh, I’d be a great customer. That’s one venture capitalists are very monolithic, unrepresented, grouping of America. But it’s also a very, very dangerous mindset.

So kind of back to your questions, there isn’t a one-size-fits-all answer here, but I think generally, like what we are, the way that we like, and kind of back to like why you don’t want a not wanting to become a kind of middleware or integration business.

It’s like there needs to be sort of a compounding effect. Every incremental node added, whether it’s data, whether it’s connectivity, aggregates the value of the network. Ultimately that creates stickiness. It hopefully creates growth. It’s rare to see these sorts of businesses. Like you see sort of maybe the bottom up adoption, where you maybe have a lightweight API and you can try it, but like pure, true kind of pure product like growth I think is a little bit more rare. But I think those are all the important insights, right?

You want to build a compounding asset because that ultimately allows you to capture market share. It also increases the value of the asset as it grows. And then you can kinda layer on accelerated kinds of products and services, which kind of comes back to like that, that initial wedge needs to be lightweight, needs to be outside of the framework of potential kind of blockers and needs to be valuable enough that people wanna use it.

And so that bar is challenging. I think there are hundreds and hundreds of opportunities and I think we’ll see them come to market over the next decade.

Advice For Founders: Common Mistakes When Pitching to Investors

Gabe Wilcox: Let me go back to some advice for founders as they’re meeting with investors.

We talked a lot about characteristics you look for in founders. What are some common mistakes that the founders should be aware of when they’re pitching investors on their business? 

Omar El-Ayat: I’ll personalize it for the vertical founder, one mistake is that they are trying to over-present or start with a posture of defensiveness of the market size.

We had a pitch meeting, we were through early on in our fundraising days and we got a lot of folks being like, well, is this real?

Is vertical software really a big opportunity? While that is a common view, that probably isn’t the right investor anyway. Ultimately, you need one. How bad the no’s are sort of don’t matter, right? And so what’s important is okay, is there a linear path to that kind of early adoption?

To product market fit to behavior change, and then if we really believe that in almost all these scenarios, the, the wedge, like while the, the wedge needs to be big enough, it doesn’t need to be the $50 billion. They’re very rare for a market at the $50 billion wedge.

What’s harder is showing that you can build a product that can get past the friction of adoption, can get to that kind of, that early flywheel and hopefully get to show behavior change. So that’s just sort of like, you know, it’s okay that there’s a way, it’s okay that there’s kind of a broader kind of view of like, we start here, we go here.

I think the other thing, and, and I’ll, this is our bias. Like our belief is that like, and what we look for, but also what we think the right things to look for in these sorts of businesses is that revenue is an incredibly lagging indicator for these types of companies, right? Because like, you know, it’s like  if you think about sales enablement, it’s like, okay, I have five tools. I bought six one. It’s like, okay, great. Like, so arr kind of matters there, right? Because are you getting adoption? Are you getting engagement? Is there evidence that you have found a core set of valuable users that have changed the way they behave with your software?

And to us, that is the most valuable leading indicator for the potential kind of tipping of a market. There’s not a one size fits all metric there that you can stand for, but think it’s really that like what we look for and what we think, like we help our company’s position when they go out for an A or later behavior change. So behavior change means ultimately you have found a set of engaged users and there’s gonna be more of them and more of them, and then you can sell more services and more revenue. And it’s sort of a brick by brick story, if that makes sense.

Gabe Wilcox: It makes a lot of sense to me, having spent some time there personally. The other thing I like there is that a strong no is not any worse for you as a founder than a week.

You might get a little more signal out of it and it makes me think, it’s hard sometimes when you’re in the middle of having been on the founder side of the fundraising. Y It’s hard not to think of it as a game that you’re trying to win. Sometimes your company needs the money and you really do have to have a fight and get a yes.

Matchmaking Process

But it is very helpful to try to take a step back and think of it more as a matchmaking process. It’s not really about selling someone on your vision who wasn’t already prepared to be aligned. This is what I wanna talk about a little bit in my next life post-investment.

The investment, the fundraising can feel like a game, but ideally it’s just an incremental step toward building the company, and eventually having a big exit. And so you don’t really want to con someone into jumping on board who’s not gonna be the right alignment and sort of board member and partner going forward.

You wanna sift through a bunch of no’s and it’s, it’s really just as matchmaking. It’s not so much sales as it is, as it is matchmaking. 

Omar El-Ayat: And honestly I’ve seen that too. Like, you know, we’ve had some real painful stories where that was the case, right? Where like you, you feel a need to and often what we thought, like the mistake that we see is like there’s a great early business, there’s good adoption, and like they start getting some no’s or they start worrying about people’s perception of market size.

They very prematurely launch a second product or a second bucket or a second go. And it’s just like, and it’s often just sort of trying to like, sort of preemptively prove the bigness of the opportunity. And that often then ends up with sort of having a cascading effect on execution.

And, to your point, selling an investor on a business that maybe you don’t, or like a set a, a strategy that you don’t believe in. And so I think it’s absolutely right. You need one yes. You want a yes that is aligned generally with your viewpoint and how to build the business. And listen, there are gonna be permutations and variations of that, right?

But like, if it’s a 180 or a difference  or some degree of that. Like, it’s hard, right? Not to pitch ourselves, but like, it’s why we started Euclid. Over my 18 investments that I did over the last five years, six of them or seven of ’em were with Nick because I couldn’t find anybody else that sort of saw these opportunities the way I did.

At some point, I’m tired of seeing him, but then I decided to work with him full time. Hopefully we’re starting to see more vertical funds. I think I’m starting to see more people to understand this. There’s the common kind of act.

The biggest mistakes that VCs always make are like misunderstanding market sizes. Market sizes are by definition evolving, are larger and compound change. Like a great example and slightly vertical business Eha is now Carter, right? I mean, that business is one that I think many people up and down the valley regret another one.

And shout out to Ryan, he’s a venture partner with us, is Leaf Link in cannabis space, right? Like if you’re underwriting cannabis software in 2015. You’re gonna come out with a very different answer than you are today, right? You need someone that’s gonna believe in that story.

But you don’t wanna start positioning yourself as actually we’re an agriculture company or we’re an et cetera company because that can end up being an existential threat to your. 

Gabe Wilcox: Got it. So the market itself, the cannabis storage, is one of just regulated market size, just changing, right? The market market changed. I think you can also see it in the product size. The other one you point to, and that’s more the Carta example probably is, well you can just do a lot more than maybe what was in that very early pitch deck and kind of the insight to think that. Really good founders are gonna find, they’re gonna find more to do. We know for their customers and more value to add is a really good. 

Omar El-Ayat: And I find that, I put myself pitch thinking this is a silly framework for evaluating, but I do think that maybe a non-intuitive pitched idea, but like we actually find that listen sometimes, especially for certain very product focused people, demos are great.

It’s actually sometimes like a demo of the alternative is, is actually even more powerful, right? Like we had one, I remember a pitch, we ended up doing it where like it was a video and I was like, Jesus, Jesus Christ. Like this is incredible. And so, because I, I think you can put it in words and you could say, this is how it’s done. And you’re like, yeah, this is a $300 million industry and this is how they’re doing it. And it’s like, they want technology, they want to do it better. These are highly successful people. And so I actually think that that’s a really powerful message because listen, most VCs aren’t buying. They’re not buying restaurant supplies. They’re not buying million dollar, million dollar construction equipment. They have no idea. I actually think that that’s the cause of every software. It kind of looks similar. I’m not trying to dispar, but like, it’s hard to get across the immense value of your software. But what you can show is like, Hey, look, this is what we’re competing against. This is the alternative. I think it’s a really, really powerful message.

Gabe Wilcox: Every time your bet is that the product itself in one year, much less six, eight years into the life of the company is completely different from what you’ve seen. You’re seeing like a kernel of what the thing is gonna become. So was this video? Was the video like somebody takes a clipboard and walks back to the cooler and counts how many heads?

Omar El-Ayat: I’m trying to think about how I describe that given away by the company, but let’s just say it’s a construction company and it was showing how they did a specific process and it was like there were numerous kinds of health and safety violations and it was like industry standard. 

I think the other really important element here in terms of exits and like you think about like, A lot of these markets, there’s not gonna be anything comparable. What there is gonna be is like an indu, like a non-digital kind of industry comp. I’ll use some well-known consumer examples. Like Airbnb got beat up forever about market size at least early on, right? That market’s small, but the market they’re competing against is hotels and a massive market. Their competitors are Hilton and Marriott not whatever it might be. Uber, obviously the taxi market, big market, right? And so we look at it, it’s like our business in heavy construction, it’s like the competitive set is not software or anything. I think five or six dealer groups doing billions of dollars a year across the US. People are looking for that comp. There are highly successful, highly profitable businesses that again, are not directly competitive but adjacent to what you’re doing.

And I think it helps VCs kind of triangulate, like, okay, if they’re successful, that’s an incredible business. And so it’s, again, it helps to set a peer. Like it helps, I think to kind of strain the mind around like the potential opportunity.

Gabe Wilcox: You have to talk about spending that they’re already used to making. It’s often not technology spend, but we spend this much in brokerage fees or we pay people, we spend this many hours every week or every month doing this process.

That’s really bad. And, here we have a way to solve that for you. 

Founder and Investor Relationship

I wanted to talk a little bit about sort of post-deal how founders and investors work together. What has been like in your experience? It’s a big deal and it’s a big unknown. I know for a lot of founders, when you go from, my board meeting is sort of me looking in the mirror in the morning, or maybe I’ve got a co-founder and we go offsite to a coffee shop once a month and, and meet each other up.

Tell me a little bit about how that works. What are some good models for collaboration and what are some pitfalls and, and how can people avoid them? 

Omar El-Ayat: One of my early mentors in my career shared, which was a good board. This does not build a good company, but a bad board can ruin a great company. It could not be more true. From the founder perspective, as you spend time with the team, with the potential kind of funding partner, really understand their kind of their core philosophy here.

We obviously have, have put a lot of thought into ours. There’s a sort of a tipping point where like the early function of us for the board is really for the company.

At some point it becomes a little bit different where it’s sort of like this broader governance and kind of reporting exercise. Really early on it’s like this is a time for the company, for the team to try to remove all formality, like try to remove as much prep work as possible. lLet’s engage and think about what are the, like what are the kind 1, 2, 3 things that are challenges. Our entire framework for how we engage is like we’re gonna help you with a product, we’re gonna help you with this. Our belief is like, there are gonna be in every, in every month, and every quarter, one or two, like relatively. Like common, but also challenging, kind of like pitfalls that are sort of preventing you from getting that vertical adoption. Sometimes it’s sales, sometimes it’s business models, sometimes it’s like we got the product wrong or there’s sort of a lot of characteristics around it, but generally it’s like we know where we’re going and we kind of can have the, like we see. Early, back to our point about leading indicators.

You can kind of track and measure that, right? What we’re ultimately trying to do is like, help us help you unblock these things as they come and they’re gonna be frequent and they’re gonna come hard, and let’s do that in a consistent cadence. And so that’s often very much outside the board meeting, but I really think it’s important, like every investor has a different philosophy.

There are investors that wanna be in your office working on product strategy. And I’m not saying that’s right or wrong. It’s not what we do, right? It’s something that I would really dig into as a founder, right? Is this a person you could potentially spend the next 12 to 15 years working with? This is their philosophy of like, do I wanna buy with her selling? I mean, just to be very blunt, right? Is this person additive? Experts like getting you to zero to one and head start to a hundred.

And I think that’s sort of a philosophy that we, you know, how we laid out what we do. I think that’s important to align your philosophy. Like some, some folks want investors that they ever hear from, like, that’s probably not us. Some folks want investors that are, you know, going to make all their first hires for them. That’s not us either. I’m not saying any is wrong or bad, or, I mean, maybe the investor doesn’t return your calls, but generally, it’s like, it’s an important, an important element because. You can get divorced, but you can’t fire your board. And so, or you can’t fire your investor. It’s a really, really important decision and one that’s very, very difficult, if not nearly impossible to unwind.

Gabe Wilcox: I think it’s right. I had the same thing in my head. I’ve heard it in my career too. And now, now that I’m married and I have kids, the divorce is probably harder if you don’t have kids. 

Back to the importance of the matchmaking process versus the sales. The hard sales process because you have to live with each other for quite a long time. There is a big delta between a positive relationship between founders and board. This is especially important for like, for vertical founders is like, it’s also the durability of the relationship, right?

Omar El-Ayat: So there are some funds, for example, that are like we’re gonna help you with your first five hires, or like, we’re gonna introduce you to your first five customers. And like, I’m not saying that, that’s great. I’m not saying it’s not that the upper bound of the valley is gonna diminish over time, right? Ultimately if you can find your own customers that doesn’t really matter. I’m not saying to disparage a model, I’m just saying that. The short term fixes and gains may not be kind of aligned with what you need in 6, 12, 18 months. And obviously, listen, we’re all going to, we’re all trying to get adoption in product market fit. So those things are certainly helpful.

But I do think as much as you can to think about it as like, is this someone I can work with, I wanna work with today, tomorrow, in the future? Cause it’s not simply about, you know, it’s not a transaction like a, your seed investor. You’re an investor. Like they’re not going away. They’re gonna be there along, along the ride.

Gabe Wilcox: Yeah, it’s probably right. The only thing that comes to mind that’s a little bit counter to that is there you’ll, you see if you think about early team members and early hires you bring on, now co-founders like up there with the board members, pretty hard to get divorced from your co-founder, but yeah. You do have these sort of early team members whose role tends to change over time. The organization can outgrow, for, frankly the organization can sort of outgrow them in a certain role. And so there can be a transition either. To something else in the org or out of the, or out of the company in some cases, which is a little painful, that, that can, that can be a little bit true.

Omar El-Ayat: You should pick your seed investor based on who is gonna be. Best partner to get you to the Series A. The best union investor for my IP is sort of not really. So I think you’re right. I was a little bit hyperbolic in the extreme, but I think it’s, it’s more around the idea of like, uh, like near term services are great.

I think they have a pretty quick shelf life, right? Maybe I’m a little biased because we help with hiring, we’ve done some formation safe stuff and we are really hands on. Those are more co-founder types. It’s more network driven like, but I think if you’re thinking about generally like, you know, building an IC across the board, like yeah, that’s helpful, don’t get me wrong, but it’s ultimately time and effort, right? And I think those things are important, but I think they can be built internally.

So it’s, again, I’m not saying that’s wrong or it’s saying it’s poor, I’m just saying. You have to think about it holistically across the board.

Wild Success

Gabe Wilcox: The last thing that I wanted to make sure we talked about is about wild success. It’s about, it’s about exits. You’ve been a part of several investments in companies that had really, really great outcomes. I would love to hear your thoughts. 

How does a strategic acquisition work? How does it tend to get started and how does it flow?

Omar El-Ayat: I’ll give two examples.

I was one of the least investors in Postmates way back when that was sold to Uber. I was the largest investor on the board of Building Connected. We sold it to Autodesk. I have a couple other examples that I can point to that the journeys for both these businesses were incredibly, incredibly kind of hectic.

There were peaks, there were values, like there were times where we thought we were out of luck, and, and I don’t mean to say that we were running it like this, these were not straight lines up into the right businesses. And I think it’s an important thing to share with founders that most great businesses are not built kind of literally up into the right, like there.

Deep challenges. There are many kinds of slight pivots. It is truly, truly a long journey. One thing that’s universally true about every business is always changing their website.

Like every roadmap of every business, every quarter. You know, website update. And I think it reflects that, even the largest, greatest businesses are evolving and changing and some of those are really, really painful. I just wanted to share that it’s an important element. So to your point, I think these things evolve generally, like, I think for both in like, and these are.

I actually have a third, I sorted Service Max early in my career. We sold it to GE. In these three scenarios, it came out of a financing candidly. For Postmates as we filed to go public. And that was sort of the decision point.

For building, I think we were out raising a series C. For Service Max actually GE Capital as an investor. So there was sort of an existing conversation relationship we had. With Postmates and, and Uber, obviously they were direct competitors, but Autodesk, they were a partner, right?

So there was a little bit of a relationship there. I think it kind of came together very quickly. There’s a couple of companies that came to four. We ended up getting two bids. I think the Autodesk one made the most sense long term for the business. They obviously have invested a lot in growing that platform.

I’m running over on my venture cliches, but the, uh, you know, companies are bought, not sold, right? And I think in all these scenarios, there was something impending that caused, whether it was an outside term sheet or a financing that caused a little bit of urgency.

Really hard to get, you know, meaningful multiples in value if that, if some of those characteristics aren’t right. And that’s not saying that like, hey, like sometimes you get an offer and you can run a process and that can drive value, but there’s still, there is some sort of casting effect.

The simple advice that I would give is, obviously it’s hard to like to partner with a direct competitor, but partner. Partner with the various stakeholders, even if it’s not gonna bear fruit. I don’t think that many of these partnerships, especially early, are probably gonna be that meaningful, but it gets you in the right conversations.

It shows sort of like the possibilities for the acquisition. It’s never too early to start and I, you know, you never want to be banking on it as a core part of your strategy. You start the conversation, start the relationship.

Show the potential. You, you get an insight into the roadmap, right. And I think it really helps to start that as early as viable, right? 

Gabe Wilcox:  I’m biased as a banker, helping sell companies or helping them raise money. It’s interesting that there were great companies bought, not sold as is. You do hear it a lot, but I also think great, great exits are, come from. They come from a good job of selling, right? Those outcomes happened because there was a financing process.

There was something going on where the company was out on the market. They were telling their story. The strategy around them started to understand, well, this is, as you said, a decision point. 

Selling the vision is just like so core to what you do. I think that’s how I see these good exits. As a banker for sure, that’s what we do. We help, you know, refine that message. We help, you know, just do the work, run the process to, you know, to, to kind of get the deal done.

But, it is collaborating with the founder, client to say. You gotta sell. Sell this story, sell the vision.

Omar El-Ayat: I won’t name the company, but I’ll add to that to say in each of these scenarios, even the scenario, we literally had two offers.

We ended up engaging in investment banking and we knew really well. And I think the argument is, it was a young first time founder, a lot of money. I think the argument for us was, this is the most meaningful kind of outcome and exit of your career, and you are competing against you.

I’ll be pejorative cause I don’t think this is the audience, like people that are, uh, do this for a living. Right. These are, you know, for people like me, many people that like, not say that they’re, that they’re malicious, but if they’re, you know, it’s their, it’s their job, right? And like to be a, a sort of a, a first time founder, even a multi founder who would like, who doesn’t have the expertise, like you want people who have done it before, who are your professional, then I think it’s universally true across the board that like, you want the best lawyer, you want a banker who is, uh, understands like not, you know, like how do I package a business?

How do I engage with the buyers? Because it’s, again, it’s like there are very small influences along the way. I have compounding impacts on the outcome. And so I totally agree. And we pushed that, that founder ended up engaging with the bank and I think he was incredibly, incredibly thankful for it in the end.

It’s the specialized process like everything else, and I think having specialized experts in your in your corner only adds value. 

What's Happening In The Market Now

Gabe Wilcox: Yeah, it makes a lot of sense. To kind of close, I’ll leave it open to you in the end, but one thing we didn’t talk much about yet is sort of the market today.

Probably a question a lot of founders have is just tell me what’s going on right now. Iit’s obviously a different world than it was a year ago. What do you see? 

Omar El-Ayat: It’s a volatile situation. The easiest way I would characterize it is like the burden of proof around sort of the viability of business has shifted heavily onto the founder, right? I think that’s probably somewhat healthy. I think over the last two years it was sort of like you point to a point to a star and you say, We’re going there and, well, I’ll feed you over there.

I think what that means in terms of day to day and then your term is. I think there’s a lot more focus and worry around economics and profit and potential profitability. 

And so like you don’t want, like, people are less aggressive to back businesses that are gonna be highly consumptive, but I think there is still plenty of capital we’ve seen in our own portfolio out there for companies. I just think that there is, you know, there’s sort of a need to have your assumptions proven for the viability of the business.

I think that the focus is on profitability and  not on cutting down delivery time from eight minutes to three and a half. It’s like, uh, I think there’s still a lot of great investors, a lot of capital out there. And again, it’s finding 1, 2, 3 people to say yes, right? You don’t need the entire world to agree with your perspective, thesis and, and, and approach. 

Gabe Wilcox: I think that that all resonates.

I mean, there is a saying, um, around, around the oil and gas business, I think about how, you know, when Wall Street’s handing out free cookies? Yeah. You might as well take two, and that makes sense in that industry, right? When the money’s cheap. That’s an industry that, that, that, that needs the money, or at least can, can easily figure out how to spend the money.

It’s a little different actually. You know, like reflecting on my  perspective as a founder. The money isn’t free. There are trade offs to even the easy, easy money. That’s something that I always, um, try to encourage people to keep in mind.

Raising too much money, raising money at too high of an evaluation, and these early stages, that’s not really free money into your, into your pocket. That’s actually, that’s actually sort of a new bar that you have to go to. Exceed, you know, with your, with your outcome to, to be a success. And, and for some businesses it makes a ton of sense, um, because the opportunity’s so big or the competition is stiff, or there’s capital, you know, needs, but for some businesses, you know, being over capitalized is, is really bad for a founder.

It’s really tough thing to do at an early stage. 

Omar El-Ayat: And I think that like those decisions, and it’s happened to me in my own career of over capitalization aggressive evaluations. I’ve seen that kill companies and I think that really hasn’t been a thing over the last couple years. But I think you’re gonna see that.

I hope it doesn’t happen, but I think it’s, these things have cascading effects, right? I think that’s spot on. And, you know, maybe offline, just a slight segue, I’d love to hear the rest of the oil and gas sayings. I think about my venture. 

Gabe Wilcox: Yeah. But about 25% of them are actually appropriate to share in a public forum like this. And the other three quarters are, probably not. They’re, it’s a colorful, it’s a colorful business. I’m sure. 

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