Satya Patel

Quick Chat with Homebrew’s Satya Patel

By Semil Shah

Some people are operators, some are investors. Few have so effortlessly moved from one side of the table to the other — and back — as Satya Patel, who over the course of his career has held such roles as VP of products at Twitter, partner at Battery Ventures, senior product manager at Google, and senior associate at Impact Venture Partners.

Put another way, Patel — who in 2013 cofounded the venture firm Homebrew with former Google colleague Hunter Walk, an outfit that’s already on its second fund — knows a thing or two about Silicon Valley’s undulations. We talked with him about it recently.

With companies staying private longer and fewer M&A deals being done, how much of a liquidity crisis are early-stage investors facing?

Most early-stage investors have a long-term horizon for liquidity, so the fairly recent changes in the IPO and M&A markets haven’t had a major impact on their ability to raise new funds. Over the longer term, if the IPO and M&A trends hold, the combination of a lack of liquidity and expensive holdings is going to mean a real crisis for them.

Do LPs sense exits could be further out given the shifts we’re seeing in the private markets?

Yes, LPs definitely see that the time to achieve liquidity is longer for various structural reasons. But the bigger concern is the increase in cost basis for most investments, particularly at the later stage. They believe that when liquidity does come, returns will be depressed relative to historical norms for all except the very best funds.

What’s a deal at Homebrew you missed on and regret?

The honest answer is that we’re only two and a half years old, so it’s hard to say that we regret anything that we missed or passed on yet. Those companies are nowhere near liquidity, even though in a ton of cases they have gone on to raise huge amounts of capital at high valuations.

That said, there was an investment in the commercial real estate software market that we lost six months after starting Homebrew that we consider a likely major loss. The company chose to work with investors that had been around much longer, with extensive track records in relevant markets. We would have made the same decision at that time as the founders, but we still consider it one of the ones that got away. In general, we have conviction about our strategy and believe that in many cases, we’ve passed up short-term write-ups to avoid long term pain.

There’s been a growing chorus of people saying that seed is the new Series A. Do you buy that?

I think the labels are meaningless. At which “stage” a fund invests and with what dollar size investment is largely a function of fund size. Our goal at Homebrew is to be first institutional capital supporting a company with an investment between $200,000 and $1 million. Often that is pre-product, and other times that’s with a beta or more developed product in the market. Because there are so many seed-stage companies, the bar for raising the next round of financing is that much higher; even more is required to stand out from the crowd. So maybe in the past, you only needed to build the product with seed dollars. Now, you have to build the product and establish product/market fit with seed capital. Does that mean seed is the new Series A? It doesn’t matter what you call it. It’s the new normal.

You’ve been in the Valley for a long time. What’s your sense of the health of the overall ecosystem right now?

The ecosystem seems to be as strong as it’s ever been. There are more startups, more sources of capital, more information resources, more places — accelerators, labs, schools — to learn and more job opportunities than I can remember. The countervailing forces of limited liquidity and frothy valuations may slow down the ecosystem’s momentum. But there doesn’t seem to be anything that will stop the ecosystem from continuing to grow in all of those areas if you take a long-term view.

The Opportunity: Servicing the New, On-Demand Service Worker

While consumers wade through the ever-ballooning list of brands wanting to wash their clothes, clean their homes, park their cars and deliver them dinner, a newer crop of startups has begun catering to the needs of those contract workers who make the on-demand economy possible.They’re smart to be zeroing in these independent contractors. On-demand employees represent a huge and growing wave of people who now operate as free agents, with the freedom and flexibility — and often instability — that’s part of life without a corporate parent. In fact, Intuit has somewhat famously predicted that fully 40 percent of U.S. workers will be “contingent” workers by 2020.

Patricia Nakache, a general partner at Trinity Ventures who has led deals in on-demand companies, including Eat Club, calls 1099, or contract, workers part of a generational shift. “Millennials are much less receptive to the monolithic education or work-experience notion that, ‘I’m going to have this job with a single company for 10 or 12 years or take all my classes from one-four year institution,'” she says. “They’re really beginning to question the boundaries of those experiences.”

And VCs have begun meeting with companies that cater to them.

For example, Homebrew cofounder Satya Patel points to several companies that hope to serve the most immediate needs of contract workers — which, in most cases, is frequent and steady work. Peers, for one, a San Francisco-based, still-in-beta startup launched by RelayRides founder Shelby Clark, wants to make it easier for people to find, compare and manage on-demand work opportunities. (It also points them to tax, financial and legal resources.) Kung Fu, an eight-month-old San Francisco-based company, is similarly building a platform to help people earn income based on their location and skills.

“I definitely think there is a major opportunity” here, says Patel.

Nakache is meanwhile seeing more startups approach contract workers from specific service angles. One such group are applicant tracking systems startups that — unlike predecessors catering to larger companies — are designed for batch processing. OnBoardIQ, an eight-month-old, San Francisco-based outfit, is among the newest startups trying to streamline the process hiring hundreds of people quickly. Playbook HR, a 10-month-old, San Francisco-based company, also began life as an applicant tracking system (though, sorry investors, Intuit acquired it in March).

According to Nakache, WorkPop, a year-old, L.A.-based company that’s been building a marketplace for hourly workers to find food and retail jobs (and which Trinity has backed), is beginning to eye the category, too.

A separate group of companies has sprung up around background checks. One of them is year-old, San Francisco-based CheckR; another is three-year-old, London-based Onfido. While background checks are nothing new, the industry hasn’t traditionally needed to act quickly or process large numbers of people at once; meanwhile, newer companies are only too happy to do both, even if their predecessors aren’t readily ceding the territory. (Uber, the ride-hailing company, uses Hirease, a 13-year-old, Southern Pines, N.C.-based company, to vet its drivers. Competitor Lyft similarly uses a more established company, 40-year-old, New York-based SterlingBackcheck.)

Yet there are other types of companies catering to the specific needs of contract workers.

Don’t be surprised to see more shift-planning startups like five-year-old, San Francisco-based ShiftPlanning and four-year-old When I Work in St. Paul, Mn.

Payroll startups that make it easier for contractors to get paid are also springing up, from four-year-old ZenPayroll in San Francisco, to 1.5-year-old Tiempo in Sunnyvale, Ca.

Of course, healthcare — which most contract workers don’t receive from their employers — may represent the biggest opportunity of all. Among the startups beginning to eye the space: two-year-old, San Francisco-based Stride Health, a health insurance recommendation engine that’s targeting the needs of small businesses and sees 1099 workers as a potential source of business.

There are so many startups beginning to target 1099 workers, in fact, that Nakache says Trinity has yet to pull the trigger on a related investment. She doesn’t expect it will be long, though.

“We haven’t found quite the right fit for the stage at which we invest,” she says. “But it’s safe to say that we’re actively looking and actively engaged in the sector. We have a lot of companies on our radar screen.”

Four VCs on What’s Happening Now in On-Demand Startups

Last week, at the On-Demand conference in San Francisco, StrictlyVC interviewed a panel of venture investors about the many companies they’re seeing – and funding — that deliver food, massages, and medical advice in real-time. We talked about the opportunity presented by these startups, as well as the many open questions that on-demand companies have created.

The panelists – Patricia Nakache of Trinity Ventures, Satya Patel of Homebrew, Simon Rothman of Greylock Partners, and Steve Schlafman of RRE Ventures – each had thoughtful points of view. And while our recording of the event wasn’t crystal clear, owing to the room’s acoustics, we were able to piece together parts of that discussion below. Hope you enjoy it.

So many on-demand companies have now been funded. How is that impacting what you’re seeing? Are there fewer on-demand startups knocking on your doors or more?

SR: I actually counted. If you look at marketplaces, [we’ve been pitched] by about 1,000 of them in the last 18 months.

SS: We’re seeing them every single day. It’s across the board: B2B, B2C, infrastructure, some more horizontal apps in platforms; we’re not seeing any let up at all.

SP: We see 200 new companies each month and probably a quarter are related to the on-demand economy.

What are they centered around? Anything really novel?

PN: They come in cohorts, seemingly, so a couple of weeks ago, it was alcohol delivery on-demand and on-demand massage startups. But we’re also seeing more companies in transportation, in food delivery, in health and wellness and finance.

SP: We’re not seeing any slowdown in transportation [and food delivery] companies. We’re kind of seeing things in every single vertical.

Does that make sense? Is there enough untapped opportunity to support more food-delivery startups, for example? Where are we in the grand scheme of things?

SR: There’s definitely too much money [funding these me-too startups]. The odds of five companies ahead of you falling apart is probably not a good business [strategy]. It’s okay not to be the first in a space, but once a space feels like [earlier companies are] approaching liquidity [meaning they’ve established both supply and demand], it’s probably time to move on to another space.

How narrow can these startups go? Would you back a startup that’s say, delivering dairy products exclusively?

PN: It’s the age-old debate from the software world: Do you invest in a platform or a best-of-breed solution, and I think it depends on how big the problem is that you’re solving. I think you can go too narrow to justify a standalone service, but does Uber eat the whole world? No, I don’t believe that.

SS: It’s not just obvious industries like transportation and food. Pretty much every industry where there are service-based professionals is up for grabs. One of the craziest ideas [I’ve heard] is private investigators [which is] this weird market that exists probably on Craigslist and on the web and [a startup is now] taking it and making an experience out of it.

Certain white collar professionals might argue that their industries can’t be too thoroughly disrupted because of their relationships with clients.

SP: I don’t think there’s any professional service or product field that can’t benefit from improved efficiency.

SR: It’s about quality. Take medicine, as an example. The outcome matters; it can mean the difference between life and death. Not everyone lives in a market where you can get a great doctor. Technology can remotely deliver that care, giving you truly efficient access to the world’s best [physicians], and I think that trumps anything having to do with your relationship with a mediocre doctor.

Would you rather fund a telemedicine or other business that doesn’t require rolling out locally, versus startups that have to physically tackle city by city?

SR: It’s a lot easier. Anyone who has tried to build a marketplace nationally will tell you [that] every local marketplace is almost like doing another startup. You [may have] a playbook, but you have to get supply and demand in every city over and over again, you have to customize it, sometimes you have to have a local team. The footprint may be smaller of [that distributed] team, and the demand may be centralized, but you still have decentralized supply.

For companies that do go the city-by-city route, what are the top things they should have down before expanding into new markets?

SR: Well here’s the one thing to avoid. I think everyone is trying to take Uber’s local rollout playbook and just copy it, but it doesn’t work.

Why?

SR: I don’t think local presence is mandatory. I see a lot of companies with a local presence in every city they’re operating in, without any good reason other than, that’s how it’s done. That’s actually not how it’s done. It’s how Uber did it and that’s fine and it works for them. But the default should always be to keep it in-house if possible.

SP: You’re going to better understand where things are likely to break in remote cities if you take the time to understand your own operations.

SR: The push right now is to get big fast in lots of markets. But if you haven’t unlocked the core market you’re in and really made your experience amazing, your chances of success declines with every city you expand into. Being first to the market isn’t winning. Being right is winning. It’s a race to liquidity; it is not a race to geography.

Speaking of which, from a logistical standpoint, how do these on-demand startups address everyone who doesn’t live in an urban center? Would it make sense for more of these startups to launch early trials outside of major cities?

SP: It’s more about more use that’s being addressed. If a company is solving a universal [problem] and its way of doing that is clean and focused, it doesn’t really matter where it starts. Operationally, it’s easier to build liquidity in more densely populated areas. There’s a question of whether some of these work in suburban areas, but operating early in urban environments gives you the flexibility to figure out suburban environments.

What if they don’t work in suburban areas? Is there enough supply and demand in cities to justify these investments and valuations?

SR: If you can get a meaningful percent [of the overall market] in those large areas, you can build a very large company.

On-demand companies are dependent on contract workers. What happens if regulations change in such a way that companies have to treat them as full-time employees? Is that a concern, and either way, do you think these companies have a responsibility to turn these contract workers into full-time employees at some point?

SR: I personally think the 1099 [tax classification] framework is broken. It existed in a world of monolithic, centralized corporations, not in a world of distributed companies, so I think there needs to be a third class of worker [and that we’ll eventually have one], though it will take a while.

[I think these] decentralized environments are the future, and [that’s a good thing as] they enable assets to be decentralized, too. Uber doesn’t need to [own cars], for example, and that produces more money that can be pushed back to the company and customers and its employees [so that we’re eventually seeing] high-wage jobs with a lot of control.

SP: I think regulation is going to change, but in the short term, as a business, you can decide your responsibilities will be dictated by a framework, or you can decide that your responsibilities are dictated by what’s right. And [these companies] need to do what’s right, which is to take care of workers and provide them not just with benefits and uniforms and living wages, but real career paths with the ability to grow their careers.

SS: [Our portfolio company] Managed by Q [an on-demand office cleaning company], said early on that ‘We’re actually going to hire the workers and give them a great culture and train them and give them career advancement,’ and I think that’s brilliant . . . because at the end of the day, those employees are who your customers are interacting with, and you want to make sure they’re as good as your product.

SP: When workers are getting all the [traditional benefits they’ve enjoyed], they’re likely to stick around longer, too.

Hunter Walk on Thinking Longer Term

It seems like yesterday that Hunter Walk and Satya Patel officially closed their first $35 million venture fund, but it was actually early last summer. And in the life of a seed-stage firm like Homebrew — where Walk and Patel have two-thirds of their capital reserved for follow-on investments — that’s an eternity.

No wonder Walk – who previously worked for nine years at Google – and Patel – who logged a decade at Google, Battery Ventures, and Twitter – are already thinking about what a second fund might look like. Walk and I talked about it last week over a burger at a San Francisco eatery. Our conversation has been edited for length.

You say you focus on the “bottom-up economy,” services and tools that make it possible for small players to compete with big companies, including, more recently, looking at bitcoin as a bottom-up currency; 3D printing as bottom-up manufacturing; and drones as bottom-up satellites. How else does Homebrew distinguish itself?

We didn’t create Homebrew to create more noise in a crowded marketplace. We felt there was still a pretty small number of seed-stage funds that will be around for a long time, that have been started by former operators, and that want to take front-of-the-round positions.

Why makes you better positioned than some?

First, having a partner who has done venture before [is a big advantage]. There’s also a set of best practices and certain frameworks and models that we’ve thought about in advance — such as [around] what cash flow and portfolio management look like — that sometimes folks who’ve only come from an operating background or angel investor background don’t really understand.

You’ve told me you could have raised more money last year. Will you go bigger the next time and will we see a third partner?

That’s something we’ve discussed only lightly and I don’t think we’d do it in the near future. In some ways, we started Homebrew because we didn’t want to join existing funds . . . And so it’s this ironic situation where, if we were to try to find a third or fourth partner down the road, would we suddenly be the incumbent? How would we attract an entrepreneurial VC versus someone who just sees us as an existing fund? So we have to think about all that.

I think the incentives are to raise more money, [between] management fees, ego, and deal flow optionality – you get exposed to a lot of things you want to invest in. But we’re not doing this to [eventually] raise a $500 million multistage fund or become a 12-partner business that builds out shared services and competes with billion-dollar funds. We know firmly which side of the [investing] barbell we want to be on.

Roughly one year into this endeavor, what’s been the biggest surprise?

With venture — and I think it’s one of the reasons I write so much, working through my own learnings – the fund cycle is long. Satya just saw two exits from companies he invested in at Battery in 2007 and 2008. So you want to bring a sense of urgency every day, to lean in and help [your startups], but you also have to manage your own energy and keep the founders who are burning hard every day in the right frame of mind.

How?

By making their lives simpler [and doing what you can] to clear the road ahead. We also ensure boards are formed with an outside board member. Most seed investors don’t ask for a board seat and don’t care if there’s an outside board member. We care a lot, not because we want control but because we want first-time founders to build confidence and a management cadence and, when it comes time to raise a Series A, signal to other investors that theirs is a company that’s been operating with some maturity.

You don’t need a bunch of people around the table. But having worked for strong founders [at Google and Twitter] and seen the benefit of founder-driven companies — not just in year one but in year 10 — we want folks who are building something that, in their head, will be around a while. And our job is to help prepare them for that, because it’s not easy.

Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

Homebrew Separates Itself from the Pack

This summer, yet another San Francisco-based, seed-stage venture fund was formed. Called Homebrew, the firm’s cofounders are Hunter Walk, who spent much of the previous decade working as a product manager at Google, and Satya Patel, who has bounded between operating and investing roles over the last 15 years, including most recently at Twitter, Battery Ventures, and Google, where he met Walk. The two began fundraising in January; they closed the fund with $35 million in late April and made the news official in July.

Whether the firm can compete in what is an increasingly crowded part of the startup ecosystem is another story. Not only does Homebrew have many hundreds of angel investors and dozens of other seed-stage firms as competitors on deals, but it also has to contend with AngelList’s month-old Syndicates program, which enables angel investors to quickly mobilize a group of investors to back a deal.

Homebrew’s timing might look lousy, but it will make sense over time, suggests Walk, who argues that there are still unexploited niches in seed funding.

For starters, Homebrew is looking to lead or co-lead syndicates with initial checks of $500,000 to $800,000 as a part of an institutional round that’s between $1.25 million to $2.5 million. “There’s a lot of money from talented people who want to invest between $50,000 and $250,000 in companies, but a small number who want to step up and lead these rounds before there’s much data to crunch,” says Walk.

Homebrew expects to back 20 to 25 startups with its first fund, and it intends to own 10 to 15 percent of each company for its efforts.

Walk says Homebrew’s investment principles also set the firm apart. One of these is its focus on startups that level the playing field for individuals and small businesses. As an example, Walk points to Twilio, a service that helps developers build apps for text messaging and other services on phones. (Homebrew is not an investor.) Walk also highlights Plaid, a startup whose goal is to make it easier for developers to build financial applications. (Plaid recently raised $2.8 million from Spark Capital, Google Ventures, NEA, Felicis Ventures and Homebrew.)

I ask Walk about the far bigger need in the market for Series B funding. After all, it often seems that there are too few funds to accommodate the many seed- and early-stage companies that are looking for follow-on investments. Does Homebrew risk watching its seed-stage deals fall off a cliff?

Walk says Homebrew raised money from four institutional investors partly with that issue in mind. If Homebrew needs to raise more money to support its existing portfolio (à la the new Clover Fund of Felicis Ventures), it already has relationships with people in the business of writing big checks.

Another point of differentiation with other seed funds? Walk says Homebrew’s startups (it has backed six so far) have solid business models involving monthly recurring subscriptions and transaction-based fees. While no guarantee of success, Walk figures this focus on revenue might help his companies’ chances of raising money from Series A and B investors when they go to market.

“We didn’t pick ‘revenue-first businesses’ to time the market, or because we think they’re more fundable,” adds Walk. “But the type of companies we back do have clearer investment and exit paths.”

Photo of Hunter Walk courtesy of Pinar Ozger.

Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

Satya Patel

Related articles