Nate Lentz joined Osage Venture Partners in 2008, and as managing partner, he oversees investment and portfolio management activities. He currently serves on the board of directors or is a board observer for about 15 companies, including BA-Insight, HiveIO, InstaMed, Noodle Partners, Phone2Action, RackWare, RiskLens, Semantic AI and Sidecar.
Nate’s also actively involved with numerous venture-focused organizations including Philadelphia Alliance for Capital and Technologies (PACT), NJ Technology Council (NJTC) and the Mid-Atlantic Venture Association (MAVA). He serves on the board of directors and executive committee for both PACT and Ben Franklin Technology Partners of Southeastern Pennsylvania. And he still finds time to be a frequent speaker and panelist at venture events.
With so much experience in venture capital and the startup ecosystem, Nate has a lot to share with fellow VCs and entrepreneurs in this full-length interview. I had the pleasure of chatting with Nate about his perspectives on navigating times of crisis, go-to due diligence questions, considerations for selling to an enterprise, and much more. I'm excited to share this fascinating discussion with you today.
One of the things that jumped out at me right away in your bio is the importance you place on empathy. Can you talk about where that stems from and why empathy matters — whether you’re a founder, investor or board member?
Absolutely. One thing I’ve found in having been an investor for the last 10 years, and a CEO in a turnaround situation before that, is the need to put yourself into someone else's shoes when you're thinking about making key decisions or giving advice.
As an investor or board member, you kind of jet set into the company’s world and come in with your own point of view. That point of view is certainly valuable — and it’s one of the reasons the company wants to bring you into the mix — but it's really easy to start reacting to things too quickly. It’s important to be able to step back, think about how the CEO is feeling and understand what situation he/she is trying to navigate. What is the context for why they're bringing this topic up? What are they looking for from this conversation?
These are key elements to consider, and it's really critical to take your own personal interest out of your reaction and focus on the best outcome — not just for yourself but for the person you’re talking to, the company as a whole, employees, customers and other constituents. A lot of this all stems from how I wanted to be treated when I was a CEO.
Through your experience as a former CEO and a VC, you’ve gained deep understanding of product strategy, sales, marketing, finance and more — and all through the enterprise lens. Enterprise sales can be tough for some founders if they aren’t familiar with how an organization or its key stakeholders make decisions. What advice do you have for founders looking to sell into a large enterprise?
Selling to an enterprise is a very challenging process, and one that is made harder by the fact that people generally — and enterprise buyers in particular — don't like to say no. In the B2B software world, it all starts with understanding who the buyers are and their roles within the broader organization. Often times, part of the buyer’s role is to be informed and understand what’s happening in the market around technology. If what you're doing is interesting, they will almost certainly take a meeting and have a dialogue with you. Often, they may even be willing to do an unpaid proof of concept (POC). To be able to make it into real buying cycles, you need to be strategic and ask targeted questions. What industries or types of organizations would benefit from the product/service? Who are the people this benefits the most, and what are their problems/needs? How strongly will your offering align with priorities of your buyer? That last piece is critical: if you can’t demonstrate that your product or service aligns with one of the top three priorities for the person you're speaking with, then you really are not relevant from a near-term buying cycle standpoint.
The second piece of advice is to remember that buying for the enterprise can become a team event. You typically have multiple people assigned to a project that is all around identifying and buying an enterprise solution tied to a specific need or goal. It’s important to recognize that you will likely be presenting to multiple people throughout the sales process with varying backgrounds, perspectives and priorities. When you think about the process this team will go through in order to buy your product or a competing one — a good portion of this process occurs even before you have a meeting. In many cases, the buyers will come to a first meeting with a pretty strong foundation of market research done around options that make the most sense for the problem they’re trying to solve or goal they’re looking to achieve. The more you can create content that helps inform a buying team early on in their process — white papers, blog posts, webinars — the warmer that lead or first meeting will be and the more you’ll be viewed as a credible and viable company to do business with.
My third piece of advice is to be realistic with timing expectations. From the time that a buyer says, “Yes, you're selected. We want you,” to getting through the final contract is often a minimum of 90 days. Between that verbal yes and making it official, you have to go through procurements, legal and all sorts of other processes on the enterprise side. It can all just take longer than you think, and many go in with unrealistic expectations.
You joined Osage in 2008, just after selling your software company but also in the midst of the financial crisis. Can you talk about what that was like, as well as any lessons learned? How has the startup/VC landscape evolved since then?
2008 was a scary period. It felt like the whole world was coming apart, and it feels just as scary if not more so today, given the fact that we face a health crisis, which drives an economic crisis. I think we'll know more as we understand more about the impact and length of shelter-in-place and what the impact is on the long term health of the economy and on businesses, as we go forward. With COVID, this is an economic shock. Like in 2008, buyers in most sectors are freezing decisions for a period of time. But businesses can’t freeze forever – so things will ultimately reopen and go back to more of a normal state. The question we wish we knew the answer to is “how long will this freeze go on?”
In reacting to this crisis, one of the first things I learned was that every company has to look at where they are and think about how they live above the death line. It's a Jim Collins term for always having the reserves to conduct business so that you can make it through a challenging period. You need to have the resources to get through the freezing period and be in a good position to come through to the other side. As investors in 2008, we had to triage the portfolio. We had to think long and hard about who we gave capital to and who we didn’t. Today, we are doing the same thing. We are having tough discussions about cost controls with our CEOs, we are allocating our reserves and communicating our reserve levels to our portfolio.
On a more positive note, thinking as an investor, there are great investing opportunities even in a downturn. In the B2B software space, many companies buy software to improve the top or bottom line. In a difficult period, that can become a much bigger priority, and buyers may actually accelerate the decision-making process because of it. We actually saw companies that had truly differentiated value propositions do pretty well in 2009 and beyond, post that 2008 freezing period.
The level of uncertainty is extremely high right now and making investments (or raising capital for the entrepreneur) is a tricky business because none of us know the length or depth of the downcycle. At Osage Venture Partners, we are finding that pricing investments is a challenge. We have reverted to smaller rounds sizes and earlier stage structures including convertible notes with a cap and a discount to the next round. Hopefully, if structured correctly, this allows investments to continue in an environment of fairness for the entrepreneur and financial responsibility for the investor even during this period of uncertainty.
You currently serve on the board or are a board observer for about 15 companies across different industry and technology sectors. Can you share a few of the most meaningful learning experiences you’ve gained through those roles and through being so active and engaged in the ecosystem?
- Great leaders and great managers can fail. It happens. And it doesn't mean that you made a bad bet on them. You may have just made a bad bet on the business or the market they were going after. However, failure isn’t a character statement on the people in those leadership roles for the company. It’s just the reality of the high level risk in early stage businesses. I will say though – I’m not a big believer in the whole mantra of “fail fast.” I'd rather see people fail slowly and put a decent amount of sweat and effort into making something succeed, even if it's not as great a success as they hoped for. It shows the person still channels true passion, commitment and work ethic in the face of adversity.
- Boards have a lot of power. Use it for good. In some cases, boards can create a lot of damage if they're not careful. For those serving on a board, I believe the first rule should be, “Do no harm.” Part of this goes back to having empathy, like we talked about earlier. In each of my board roles, I keep this in the back of my head and try to focus on governance best practices, benefiting everyone involved in these meetings. For example, at the end of every board meeting, we have an executive session without the CEO and management present, where we create a common set of board messages that we all agree to deliver back to the CEO. You have to be disciplined and consistent with having these sessions, but we believe engraining these in our process brings a lot of good for all parties involved. This more efficient, and this way the CEO isn’t bombarded by five different phone calls from five different directors, all with a different view of what the meeting meant and what the top priorities should be.
Boards have to be careful not to act too rashly. I remember back when I was a CEO running board meetings, and the sign of a successful board meeting often felt like the simple fact that I still had a job afterwards. I don’t think it’s fair for our CEOs to feel like they could be removed after a few quick reactions, or feel like they need to field 50 questions coming from all sides. At Osage, we often include a component in voting rights terms indicating that removal of the CEO requires XX members of the board to vote, including the Osage director. This gives us the ability to slow down the process if things are happening too quickly and take a minute to step back and empathize.
- CEOs need peers. It’s critical for them to have folks they can talk to who are going through (or have gone through) similar things — whether that’s funding, sales, scale or something else. We try to help CEOs of our portfolio companies by creating a community for them to interact with fellow CEOs. One way we engage this community is through in-person events. We recently held our 10th annual, multi-day CEO event, bringing together 30 early stage B2B software companies (of course it was our first virtual event given the COVID-19 impact). The value of the network and our efforts to proactively bring our portfolio companies together is one of the most common things our CEOs mention when they're giving references for us.
What are your go-to questions that you ask founders during a due diligence process?
- Spend some time digging into background. This isn’t a question per se, but we spend a lot of time on background in an effort to understand what there is in the CEO’s background that’s indicative of a view that that they'll be successful in what they're undertaking. A lot of what we look for there is an understanding of how they think about how businesses scale. We’re looking for business builders and a knowledge of the domain in which they're building that business. That’s because we believe it’s not just about technology; it's about context. In a lot of cases when you're selling to business folks, context trumps technology. It’s all about the solution and whether the solution is right for that buyer and industry.
- What is your culture like and how will you make sure it lasts? I ask founding teams to tell me about the company culture and how they're going to sustain it as they grow from 10 to 30 to 100 people and beyond. We're big believers that the best outcomes are in companies that have fantastic cultures — where people want to work and are driving to a common goal. A subset of this for me is the hiring process. What does that process look like and how do you ensure that you'll create a great hiring culture as hiring decisions move down your team? Ninety percent of our dollars go to hiring people and spending on people once they’ve been hired, so understanding how those dollars will get deployed is key.
- What's your moat? What competitive advantage does your company have? How sure are you that you will be able to protect long-term profitability and market share? What is it about your strategy that enables the moat to expand as you scale and as time goes on?
- What are you looking for from us? We want to get insight into what they're looking for in an investment partner, besides money.
Is there anything you’re seeing in the startup ecosystem that you think is overly hyped today?
Yes – starting with capital for capital’s sake. In the past couple of years, startups have been raising these massively large rounds. The scorecard is on “How much money did you raise?” and “What was your valuation?” regardless of what kind of structure is put around that.
Put simply, you can't grow a B2B software company at 500% a year — regardless of how much money you throw at it – and have it be effective. You can't grow a company with 200 employees by 5x and assume that your dollars are getting deployed in the most efficient way. Or that every hiring decision is being made with the same deliberate effort that was made to get the first 200 employees. I think that we're seeing a lot of really high valuations and people loading up on capital, but they're also encouraged to spend that capital quickly. Eventually, I believe we’ll see that cycle come to an end.
What excites you most about the future?
Millennials and Gen Z. I think they’re in a position to solve problems that previous generations have created. They're incredibly talented and look at the world in such a different way.