Episode 12: Justin Johnson of Camber Partners
On Maximizing Returns of PLG Software Investments

Episode Transcript

Shiv: Alright Justin, welcome to the show, how's it going?

Justin: Going well, Shiv, how are you doing?

Shiv: Good, excited to have you on. Obviously, there's a lot of unique stuff that you're up to at Camber, so wanted to chat about that. So why don't we start by giving the audience a background about your role and how Camber looks at investments?

Justin: Yeah, and first of all, flattered at the invite and really cool to see what you're working on. So kudos to you and excited to follow along on future episodes. My name is Justin. I lead the investment team at Camber Partners, which is a B2B SaaS investment firm, specifically growth equity, that is laser-focused on product-led growth and sustainable growth. So we're investing out of $100 million fund one.

So we're kind of like a startup as well. But we're fairly distributed across the world with our portfolio companies as well as the Camber team. But I'd say we have roots in San Francisco and the investment team is based in New York City. And so if you guys hear some sirens or honks, I apologize in advance, but, in Midtown Manhattan right now.

At the end of the day though, Camber is a growth equity firm that partners with product-led growth, B2B SaaS businesses, and we have an operating team that we parachute in to augment management across functional areas that we think complement product-led growth well. So I'd say those three are data, sales and marketing, and talent. And hopefully we can spend some time talking about data today.

Shiv: Yeah, and what you said about the size of the fund, 100 million, yeah, that's fairly small. But when I look at your portfolio, I see some really big names like Panda Doc and Pipe Drive and Dropbox. So are you investing primarily in a minority capacity?

Justin: So Scott, our founding general partner, has 15 years of early-stage venture experience investing in those companies that you saw the tombstones of on our site. He's still an investor in many of those, including Pipedrive and PandaDoc. And I have a story for you a little bit later in the show, but we have four portfolio companies to date. So SE Ranking, Scout APM, TaxCloud and we just announced Beamer, the fourth, and we should have a fifth being announced. For fund size though, you know, we're majority investors and we're targeting between four and seven portfolio companies in Fund One. So it may be a hundred million dollar fund, but our typical cheque size is gonna be anywhere from 20 to 30 million, with the ability to flex up with LP co-investment and other sources. But it's a fairly concentrated strategy due to just the level of intimacy that we take with our portfolio companies.

Shiv: Got it. And in terms of your investment philosophy or thesis, you're mostly focused on companies with a PLG motion. Is that fair?

Justin: Yeah, you're exactly right. So we're laser-focused on PLG, product-led growth. And I know this is a How To SaaS backdrop, but product-led growth in our mind is this concept that the majority of new customers are coming in through self-service or inbound channels, and there's minimal interaction with sales. Oftentimes, that means that this product is good enough to sell itself, in most cases, to a certain point.

And so that allows us to come in, partner with oftentimes a technical founder, someone that's done a great job bringing the business to 5 million ARR and has a great product, and assist them with this bottom-up sales, kind of the opposite of an enterprise outbound software motion. And so when you compare - when you compare product-led growth to sales-led growth or enterprise software, I'd say it's about as close to being consumer software without being consumer. So very high volume funnels, low ACVs, annual contract value. And the idea is that you may have 10 or 15,000 customers paying 200 bucks a month that are able to never interact with the sales rep through the onboarding process. And so indicators of that are sites that have their pricing page exposed on the website or that allow you to do a free trial before signing up and paying so that you can touch and feel the product, because a lot of these PLG startups really do feel like the product is good enough to sell itself. So that's a little bit about PLG.

Shiv: Yeah, PLG has really become popular. I would say in the last five to seven years or so, it's a lot more SaaS companies are choosing it as their go-to-market. And there's a lot more literature out there - very famous VC firm called OpenView popularized the term and made it bigger with all the content that they're putting out there. But there's a lot of companies emerging that are focused on PLG as a go-to-market. So it's no longer a new thing, right? It is more ubiquitous. So do you see a lot of competition when you're looking at companies or target investments that are more PLG-focused?

Justin: You know, there will always be competition, especially if you think about the private markets and how much capital there is and strategies. Camber feels pretty differentiated because we've built ourselves like a software company and everything we do is data-driven across the entire investment life cycle from sourcing, evaluating, to adding value to our portfolio companies. And we can get into that. But you know, we feel like when we connect with founders and management, that our message resonates quite well if they are in fact PLG, because the types of questions we're asking are different than a traditional growth equity investor, and it's things that have been top of mind for all of these founders over the last 12, 24 months. And so we raised Fund One in 2020/2021, and the irony is that was before PLG became important, when you had the SaaSpocalypse. And so, that wasn't us anticipating a crash, but that was us trying to get ahead of the curve and back PLG because it's such a defendable business model.

Shiv: Yeah, expand on that. Like what in your mind makes it more defendable and gives it that higher upside?

Justin: I'd say first, you know, usually with a PLG SaaS product, it means that it's a well-loved product built in a horizontal market with a large TAM, and that means that there's room for multiple winners. So you may have a VC-backed competitor, you may have a bootstrapped incumbent or a fast follower, and our thesis is that, you know, linear growth is healthier than exponential growth in all of these cases, and it's actually more founder-friendly and beneficial when doing the math. And so the other point is there is a certain sense of capital efficiency that comes along with product-led growth because your entire go-to-market motion is less expensive. You don't have to hire ADs and BDRs and SDRs. You're not selling million-dollar contracts to the Fortune 500.

I'd say the third point is this concept of uncapped upside. So these businesses have maybe tracked to five or 10 million ARR. And there's a level of predictability that you can use as an investor to try to tell the future. And it's not always perfect, but when you have this level of predictability, it still offers this sort of venturesque upside, right? So, it's this concept of, if you build the right products, they will come. And I like to tell this story to founders, the Pipedrive story, which you guys may have heard about, but Scott was an investor. Scott's our founding and managing partner here at Camber. And Scott invested in Pipedrive, who is kind of a PLG darling in this space. It's a CRM. And he invested when they were at 10 million ARR, saw the growth from 10 to 100 million ARR. When they were at 10 million ARR, they were getting about 2,500 trials per month. And so when you think about PLG, it's all about funnel and conversion rates and, you know, digital acquisition channels. And so basically, Scott saw this business from 10 to 100 million ARR. Along that way, they had raised, I want to say 80 million from venture. When they reached 100 million in ARR, they sold 51% to Vista Equity Partners for $1.5 billion. And at that time, they had only consumed $12 million in capital. So they sold to Vista with $80 million on their balance sheet. And that's a great testament to a product-led growth motion, which was really just a series of small iterations and testing, when you have a massive top-of-funnel of 2,500 trials that 10x over the year at that time that allows for experimentation. And so ultimately, it allows you to go from linear to exponential in an organic fashion without having to raise a ton of venture and put it into a sales motion. And so ultimately, we think that this high volume funnel where you have a ton of customers touching and feeling the product and trying it, it allows for this type of experimentation. And it's very similar to SEO and the work you're doing at How to SaaS. And I'm sure you have a perspective on it as well.

Shiv: Yeah, I think the Pipedrive story is a great one. And in that type of a market where you look at CRMs, there are hundreds of CRM companies around and yet Pipedrive is able to find a market for itself and grow to the size that it grew to and have the kind of exit that it had, right? So with that product-led growth motion, you do definitely have a marketplace where more than one winner can emerge.

Even a personal story from my side - so the company that I built as a CMO, Wild Apricot, we were one of, I don't know, 50 plus membership software providers in the marketplace. And we were on the down market side and our average deal size was like $1,000 or $1,500. And we were able to grow well past that $10 million mark over time just by having this predictable self-serve product-led acquisition engine. And over time, it turned out that there were actually other providers that were also down market that also found space in that marketplace. So I think that goes to highlight the point that you're saying that you can have multiple winners when there is a large enough TAM and a horizontal market, where it is not - it's not a winner-take-alll market. It's actually like multiple winners that take up different segments of them.

Justin: Yeah, and you'll often see those multiple winners will have a variety of cap structures and cap tables. You'll have the VC-backed angel, who has raised a ton of venture. The founder may own a little bit of the business. But then you may have a lightly funded or bootstrapped competitor that has done a ton of little things right. And nothing exceptional, they're not an ex-FANG hero founder, but they've built a great product, they've experimented and iterated over time, and it's allowed them to move up market and increase ARPA. And in the end, Camber's thesis is that, you know, you have VC or bootstrap as two options, and our idea is that there's an alternative to that where founders are able to de-risk what they've built today while still maintaining some real upside, part of this uncapped upside, in bringing on a partner that's very operational and knows PL. And oftentimes from an economic perspective that outcome three to five years down the road can be more meaningful than if they were to pursue the traditional venture.

Shiv: Yeah, that makes total sense. So why don't you talk a little bit more about that? So what kind of work are you doing once you partner with a business in terms of coming in and supporting the go-to market or the product-led motion overall?

Justin: Yes, so I'd start with evaluating. So when we - or maybe starting with sourcing, in order to do great deals, you have to see great deals. And we think at Camber that starts with data because we try to use data across our entire investment lifecycle. And so at Camber, we have a proprietary platform that we call Gemini. And it assists us across this lifecycle. But on the sourcing side, PLG companies typically have publicly accessible digital footprints. And Gemini uses machine learning to help us originate potential PLG investment opportunities. And I'll say, we're tracking over 75,000 companies - that number is growing every day. We're collecting metrics monthly on all of these companies as well as the changes in these metrics and derivatives of these metrics and so ultimately we have Gemini which is providing us these machine-generated rankings that factor in fit, growth, market, and we have scores for each of those that we assign, and it's not perfect, but it's getting better every day and so this Gemini platform uses machine learning and uses the signals from the web and the trails that these companies leave behind. I'm not gonna go into details about the data that we collect, but they are pretty indicative of early PLG success, and it allows us to focus our origination efforts on the highest value, highest potential PLG companies. And it's things like, right, does this website have a pricing page? Do they offer a free trial? You know how many G2 reviews do they have? How much have they raised? And then a ton more.

Shiv: Mm-hmm. And a ton of more other factors to figure out if it's a good PLG investment opportunity?

Justin: Yeah, I'd say it starts at that sourcing. And so if we're able to take a look at that and then have a conversation with the founders in management, we're very - if you step away from sourcing and into evaluating investment decisions, once we're on the phone with management, I'd say we're quite differentiated in how we think about the SaaS business, just compared to other growth equity firms. The questions we're asking are, ‘How many web visitors are you guys getting a month? How many trial signups? What are your conversion rates? What are you spending? You know, what LTV to CAC’ - almost more venture-esque than like a control buyout shop when it comes to software. And so we're all about the funnel because what we'll do is our internal tool Gemini will take a billings export and can do things like a cohort-based retention analysis. It can take these exports and try to make sense or find opportunities within this billings data. And this is stuff an associate would typically spend most of their time doing. And often, you know, we see retention far below what's typical in enterprise software. So we may see 65% gross retention, 90% net. And the question for us is what can we do to improve that? Is there an upgrade path in order to get that net retention above 100%? And can we do it through a PLG motion and future product investment? But I'd say when we're evaluating investment opportunities, we're laser-focused on organic inbound, self-serve channels, and we're very KPI-driven, rather than certain verticals or geographies or financial metrics-driven. Like, we need this company to be at least 3 million in EBITDA. We need family-founder own. So that's not our focus. We're very metric-driven.

Shiv: Got it. So even in what you're collecting from these companies, you're using that to educate your Gemini tool so that you can make better investment decisions in the future.

Justin: Yeah, you're exactly right Shiv. We're basically - we'll take a massive data request from the company, everything from customer funnels, changes over month, MRR billings data, exports, we'll feed it into Gemini, and Gemini will allow us to segment and slice and dice their customer base. And that oftentimes can help us highlight certain high-value segments within their base or opportunities for product investment. Whereas if you have a company that has a drop-off rate, in SMB and mid-market SaaS, you have a lot of these gym membership types of customers that sign up because they wanna use it once and then they churn immediately. And so if you're able to distil the noise and dive into the actual value that the platform is providing, you can usually find a few needles in the haystack or diamonds in the rough that you can focus on.

Shiv: And given that you're focused on PLG-type of companies, what would you say are the most common opportunity areas or drivers that you find? Just from subjective - just hearing you talk about it and thinking about what the reality of a PLG company would be. It would be improvements in conversion rates, improvements in net retention and things like that. But just wanna hear, like, what are some opportunity areas that you're seeing?

Justin: Yeah, it's a great question, too. So, you know, we have this Gemini platform and what we tell founders, and they usually agree with, is that we have built basically this data layer and data infrastructure at the Camber fund level. So we have a data team and a tech team at Camber that's built internal software and processes. This software does a few things. It plugs into the systems of all of our portfolio companies and it helps them and us make better data-driven growth decisions. But it also - once fully deployed, it collects over 500 data points, starting with product usage and engagement. So it offers product analytics. And so what that tells us is we're usually easily able to define an ICP or a high-value customer, but we're also able to define what we call healthy MRR, healthy revenue. Because along the growth journey, a lot of the founders of these PLG companies may be technical in nature and they've built an incredible product that serves a use case, but they may be facing headwinds and trying to go upmarket and sell to larger customers. And in order to do that, you have to realize what those needs are. So finding those high-value customer segments within the base and then building products for them is part of our core thesis heading into investments.

Shiv: Right. How much of a problem do you see? Because one of the things that we've seen with PLG companies is just retention being an issue where, even though you have the signups and conversions, just 90-day retention or usage is just not great. So you may have like product-market fit from a selling standpoint, but like ongoing retention and uses standpoint, it's just not enough people are sticking around through the year two or year three. So how big of a problem do you see with the PLG companies as you’re encountering them?

Justin: Yeah, so I think pre-investment, it's all about highlighting, is there an issue with retention? How can we solve that? Usually, we've been solving that with product and investing in product and people to build a better product that keeps customers happy and keeps them around. I'd say ultimately offering an upgrade path to these customers because when you have customers that are on the platform that are using a feature and they may not appreciate it for a long time, like maybe they've gotten all their value in the beginning and they're not active on the platform, that's something Gemini can detect. So they can measure engagement and they can measure usage and keystrokes by users. And so it really is a bottom-up analytics-driven machine learning platform that starts with telling us who the most engaged users are, because there's a good chance that those may be the ICP that we should be focusing on and building product for.

Shiv: Got it. Yeah, that makes a ton of sense. Okay, so let's say you found a company, you sourced them, you've evaluated it, now they're part of your portfolio. What are the ways in which you're leveraging data to actually add value to these investments?

Justin: Yeah, so I'd say everything I just talked about is kind of like the thesis pre-investment and then implementing it post-investment is always fun because there are learnings and sometimes you're right, sometimes you're wrong, it's a thesis that can be proven wrong. But ultimately, usually with our investments, we have this thesis that there's a specific product investment that's required to grow ARPA, improve retention and enable these SaaS platforms to move upstream and serve larger clients without having to raise venture money and build an outbound selling motion. And so I'd say product is a heavy investment focus. Post-close, we're heavily investing in product, which is less tangible. We're targeting and testing various ICPs. And I'd say, ultimately, we don't have all the answers coming into a partnership, but we do have the tools and team that allow for this collaborative experimentation. Because we're horizontally focused, we're not going to say, ‘we're the experts in security’, you should bring in ex-FBI colonels to sit on your board and sell top-down through the CISO. We're more about, hey, we realize that you're optimizing for, you know, trial signups, when indeed, maybe the true measure of success is healthy and retained MRR. And what does that customer journey look like and journey mapping look like, which Gemini allows us to do, to work backwards and then optimize, you know, the customer journey and acquisition journey to better serve that healthy MRR. So it's very metrics-driven, and I can tell a story about SE Ranking on how that was implemented.

Shiv: Yeah, sure.

Justin: At the end of the day, Gemini is collecting over 500 data points once it's plugged in, which enables a lot of this experimentation. So SE Ranking is an investment we originally made in 2021. It's an SEO tools platform that sells to marketing teams and agencies. And part of our thesis there was we were able to leverage Gemini to highlight this high-value revenue segment that I just talked about. The team was incredible. They had stumbled into four or five million in ARR, and they're SEO professionals, so they're all about experimentation and iterations and A-B testing. And so if you go on their site, it's funny, it's like an a la carte pricing model. You can optimize for any type of membership or subscription that you want. But one thing that we noticed and we helped them realize was they were - their North Star metric was conversions and getting people to pay anything. And when we plugged in Gemini and really looked at that impact on MRR, there was this decision that, ‘hey, let's shut off this low-value acquisition channel and focus on acquisition that supports healthy and retained MRR’. And so when you have a business that's tracking at 45 million ARR, we've actually seen great success in refining who their ICP was because when you dig into their customer base, they have 13,000 customers all over the world. They serve global marketing teams and agencies. And we realized that agencies were actually a very high-value customer segment, which is contrary to most agencies or to most verticals. Agencies are usually a nascent buyer, but when it comes to SEO tools, they've actually been -

Shiv: They're very high.

Justin: Yeah, it's actually been pretty sticky with SE Ranking. So we noticed these - you know, this is a high-value customer segment, let's focus on them and then let's go build products for them to improve retention and allow an upgrade path. So not only are we gonna prevent future gross churn, but we're gonna offer an opportunity for, you know, improving net retention. And so with this renewed focus on ICP, we went out and built these features for them. Over the course of our investment period - it's been almost two years now - we've turned around growth and kind of reignited growth and we're operating at rule of 60. And so that business does have the line of sight to 20 million ARR over the next 24 months. And it's...

Shiv: And is that primarily because of the product work and understanding that in terms of the segmentation and the ICPs or did you change things on the go-to-market side as well?

Justin: You know, the go-to-market side was very systematic. The team was great about testing and iterations. I think leveraging Gemini and using Gemini's machine learning to map the customer journey and help inform the team that, hey, we haven't had the data layer previously, but now we do. This may be the definition of healthy MRR. And if you work backwards, let's test an experiment to see, and optimize the landing page to see if we can try to attract these agencies who are higher value and retain at a better rate. And so that's something we started with. So we started with focusing on the ICP of these agencies and then we went and built products for it. But it was enabled by Gemini, and the belief and our value add to founders and management is that a lot of these companies that are sub 10 million ARR don't have the data layer or infrastructure to make these data-driven growth decisions because they're so busy heads-down building great product and they can't take a step back and test and iterate. And so part of the belief of Camber is to build that muscle at the fund level and then, as a value-add, as a real tool to help arrive at these epiphanies that you have this high-value ICP, now let's pivot the product investment direction, shift the product roadmap, go build product for them, and we've seen great success. So improvements in gross and net retention, and then like I said, turning around the declining growth rate, tracking towards 20 million ARR over the next 24 months.

Shiv: That's a great story. So if I was just to summarize the process, it's like starting with the data, understanding what's working, what's not working, asking the right questions, getting under the hood and figuring out which, for example, segments are most successful, which areas of the business are more profitable than others, understanding the right area to focus on. And then second step ends up being working on product and improving the feature set, improving the value prop, improving what value the customers are getting out of the system. And then step three is the product marketing side and actual go to market of actually communicating that to the market to then feed back into the engine of the product-led growth machine of that business. Is that a fair simplification of the process you're taking these companies through?

Justin: Yeah Shiv, you're exactly right. So I'd say that testing and experimentation will come out of that with warnings of whether that worked or whether it didn't. And I'd say SE Ranking is a great case study of when it worked exactly as how we intended.

Shiv: And there are times when it doesn't work, but then you kind of have to repeat the cycle and figure out if there's a different path to finding that way to break through.

Yeah, I think on the PLG side, what we've seen is that, one, companies just don't have a handle on all their metrics or like a true understanding of what's working and what's not working. So a lot of what you said there resonated. So when we are getting in there with clients, we do the full audit of the funnel and their traffic and their conversion rates through all the different key stages, looking at metrics and understanding their unit economics, channel efficiency and all of that. And oftentimes if it's a product-level problem, we come across it fairly quickly because you can see that even if I add more at the top, like there's just too many leaks at the bottom where when a customer comes, they're just not sticking around long enough. And so as a diagnostic, we can then quickly say, look, like your problem is more of a product-market-fit issue or retention issue that needs to be resolved first before you go down the rabbit hole of trying to scale up marketing. I think that's the truth that sometimes even founders are too close to see it because they think they're getting customers and everything is working. 

So I think that's insight level one. And then if that's actually working and customers are actually staying, then how do you ramp up at the top of the funnel and get more? And it is figuring out your best-fit customers and your highest-value customers, but also just understanding your acceptable cost per lead. So if I know that a free trial converts to a paid user on average 15% of the time, you know, then I kind of have an idea of how much I can spend to acquire a free trial because I know one out of six or seven are actually going to become a paid customer for us. And so doing that math is really important. And then judging your channel efficiency, like we find companies that have payback periods sometimes north of two years. And I've even seen companies in the five to seven-year range that are PLG-led because paid media is always working. And I've seen like two, three, $400 million companies that when they get to that stage and they're competing with some of the big names in the space, they just think like spending more is the answer when really that additional spend is just a lot of wasted dollars to add a marginal amount of revenue. So having that data discipline to constantly stay on top of what are the benchmarks you need to stay within to be profitable as a business, I think is key. And sometimes companies lose their way. And then I'd say just the third thing is the understanding of content because there's SEO and all of that type of work that's important. But I think inside PLG, because your average revenue per user or customer is just lower, you can only spend so much on paid media spend or sales staff and just people in general to acquire. But what kind of gives you like infinite return is content. And I just don't see enough PLG companies invest in content beyond SEO. Like everybody kind of understands that SEO is important, but I would say SEO is like a subset of an overall content strategy and your content is kind of like, what is your unique narrative on a space and that should connect to your ICPs and the people that you end up retaining with the product as much as possible and how you can help those ICPs the most. And I think that is just a complete miss by most companies because the more that stuff that you produce, the more helpful you are. And then that information also feeds into your product. And then when those customers find you, they feel like they found the place that resonates with them the most. And then they end up staying with you longer. So that content piece - I think PLG companies should be investing a lot more into to find success beyond those other more traditional areas.

Justin: Yeah, I agree. I totally agree. And it's something that, like I said, oftentimes you have a technical founder, but they're looking for a partner to commercialize the business. And Camber feels differentiated in being able to assist in scaling go-to-market, scaling that acquisition funnel in a capital-efficient manner. And, usually, that message is received quite well by founders because it's something they’ve been looking for.

Shiv: Yeah, I think especially founders in the PLG space - to create a PLG company, you almost have to be super patient because PLG takes a little bit of time to get off the ground. Whereas if you're selling services or enterprise software, like it's like one deal can make or break a quarter. So if you close enough deals, you're kind of good as a business, whereas PLG needs volume, right? So I do think that PLG founders are a little bit different in that where they have that patience, but then on some of these other areas, they need that assistance to ramp up their go-to-market to get the message out to more folks. But anyways, with that said, just to wrap this up, I guess one thing I'd love to leave the audience with is, what are a couple of books or a specific book or resource that you would recommend that listeners check out if they wanna learn more about PLG or some of the things that you've done at Camber or just in general to become more educated on the subject?

Justin: Yeah, resources-wise, I would say - we're an investment firm at the end of the day, and so obviously, How to SaaS is a great resource and partner and I know we’ve explored a couple of opportunities together, and leveraging consultants that know more than you. Oftentimes, we refer founders to Ben Murray, thesaascfo.com, is a great friend of ours. And he is a 20-year SaaS CFO that leads a lot of content marketing and thought leadership around how you can track success at your SaaS and how you should be translating that to financials for being fundraising-ready.

Nathan Latka and his community has been great and Founder Path is an incredible platform. Other than that, I'd say, you know, in parting words, Andreessen said ‘software is eating the world’, right? So I'd agree and add that technology has transformed the investing landscape, especially when you think about data and AI and ML. And so in order to add value and generate alpha, especially as a software investor, you must be leveraging technology throughout the entire investment life cycle. And so these times of investing via financial engineering are behind us, I think, especially as founders become more sophisticated and baby boomers retire. Investors are gonna need to do more in order to add value, win over founders and ultimately generate returns. And so our approach at Camber is leaning into the very technologies that we're investing in and trying to practice what we preach to growth stage companies across the world. And so we're actively deploying capital on a global mandate. We're at all the conferences. And so I'm excited to meet any companies that feel they fit that mandate.

Shiv: That's awesome. Well, thanks for doing this, Justin. I think those are great parting words to end the episode on. We'll be sure to link Camber and all the other resources that you mentioned in the show notes. And I know the audience will benefit a lot from that. So thanks for doing this.

Justin: Awesome, thank you Shiv, excited to follow along.

Shiv: Appreciate it.