Episode 15: Sunil Grover of True Blue Partners
on How to Help Companies Grow With a Corporate Finance Perspective

Episode Transcript

Shiv: All right, Sunil, welcome to the show. How's it going?

Sunil: Great, thank you. Thank you for having me.

Shiv: Excited to have you on. So why don't we start by introducing you and True Blue partners to the audience and we'll take it from there.

Sunil: Got it. So my name is Sunil Grover. I'm the managing partner of True Blue Partners. True Blue Partners is a merchant bank that was launched in the mid-2017 timeframe. We launched as a merchant banking platform doing investing activity from our balance sheet, organizing co-investment syndicates and investment banking advisory services for our clients. As we reflected on our investing results, we converged on AI in the enterprise as investment thesis and an early stage fund to support the companies that are figuring out the product market fit and then supporting them all the way through their exits.

Shiv: And right now, AI is like this hot-button topic. Everybody's investing in VC capital, is rushing towards that space. So how are you differentiating yourself in this space and what makes True Blue's approach unique for founders out there to partner with?

Sunil: Yeah. So I think AI has become hot, but it's been in the process of becoming hot for quite some time. So when we made our first few investments in AI under the merchant banking platform, the most innovative space for application of AI was voice. If you remember, Alexa had come out and Google Home was able to listen to your voice much better than any IVR - IVR is the stuff that you Dial 1 for customer support - was ever able to. And that was the first signal that this is no longer in the university because of cloud computing. So we've been working in that space now for coming up to five years, just investing in early stage AI companies. Couple of our initial investments did very well for us so we got the track record of how to build an enterprise SaaS company in AI, which our entrepreneur partners find extremely valuable, bringing that perspective to the table. So it's really a track record of helping entrepreneurs build businesses in enterprise software for almost two decades, and then for the last five years in AI-focused enterprise software.

Shiv: And what were those two investments, for the audience's benefit, that led to good outcomes for you?

Sunil: So the first one was Observe AI. Observe AI was a company run by Swapnil. And this was before they had revenues. We were a part of their first institutional investment round. The other one was 3C Logic, which is a call center infrastructure platform with some really innovative applications of processing the call recordings. I mean, they had the IVR piece, but really they had, in those early days, in 2017-2018 timeframe, won the most innovative startup award at ServiceNow.

Shiv: Right. And when you say pre-revenue, how are you validating the ideas in these kinds of investments to get to the kind of meaningful outcomes, right? So talk a little bit about the investment approach, because when you're around the 100K ARR or low or even pre-revenue, it's hard to know if a product has actually found product market fit.

Sunil: Yeah, so I think the common, obviously, the well-studied topic is product market fit. What we focus on is in the founder market fit. In enterprise SaaS, enterprise software, what we've concluded is you need two pieces. One is building products, second is selling products. What does that mean? Well, you need really strong technical chops in the founding team. And then you need very, very deep domain knowledge in the founding team. And to the extent that it's a new domain, it's an explodingly new market, and any prior knowledge, experience, information is more a hurdle than an advantage, then we look at people who are straight out of school as well.

Shiv: Yeah, I think Index Ventures and those guys talk about this concept of like an earned secret, right? Where you know something about a market before it actually happens. So are you looking for that in founders as you're trying to figure out their, the founder market fit with the particular idea?

Sunil: I think that's a good way to look at it. I think it's difficult to pin down, but we do have that as a framework. Having been in many of these journeys with entrepreneurs, we can tell if there is a founder market fit or not. Do we have a quantitative way of doing that? Well, yes, we do, but it boils down to building a consensus from many data points. It's not just one data point.

Shiv: Mm-hmm and from a company that's at that early of a stage, you know You're saying that you're taking it through and shepherding it through to even sometimes hundred million in ARR, like, how involved are you in that process? Are you - are you just on the finance side and sitting on the board or are you getting operationally involved as well?

Sunil: Yeah, so I think different company, different stages, different roles. So, many venture funds manage their portfolio in different ways. Eventually, we're in the service for our investors, building our portfolios. At different times, companies come and go from what we call as an active involvement to passive involvement. The places where we think there is an opportunity for us to add significant unique value is really in helping establish that product market fit. When it starts getting to more later stage, we do take a more passive role because there are other very established platforms that do provide meaningful more value at those points. But all the way up to a little bit past series A, we are very actively involved.

Shiv: And what does that process look like? Like once you found - once you have a founder who has a great fit with a market, you've backed this person or this founding team, like how are you helping these companies find product market fit?

Sunil: If we have to help them too much, it's probably not a good role for us to get involved. So our diligence upfront is in making sure it's the right fit between what we bring to the table versus what the team already has in place. Once we've identified where it is that we will be moving the needle for this organization, that's what we plan for. Sometimes it's direct involvement from people from our team. Other times it's introducing them to the right venture advisors or board members who can help take the company to the next level. Let's take a look at a recent example where we helped, we led the round, we joined the company, we knew of this company when they were pre-revenue, it was a little too early. We put capital in there once it started getting more into our zone where we could see the line of sight for a product market fit. We helped them navigate through that and prepared them for organizing a series A round, which we led, and we brought in several co-investors to participate in that round so that our partner, the entrepreneur, had the choice of which co-investor to pick from.

Part of that whole process, we also brought in a former client, friend of the firm - through a client, brought in a friend of the firm to take an investing role, a co-investing role and a board role because this individual had built a company from zero to 100 million ARR and there was good chemistry between the founder and this advisor to shepherd the business post Series A onwards. We were, I would say, actively involved with this company for about a year, where we did the business from in that 600k ARR to 3 million ARR. And that was weekly calls, weekly calls and activities and assignments around those calls.

Shiv: So you're very much involved in that process. And when you think about True Blue and your approach, like where would you say is like your secret sauce, like where are the places where you're adding the most value to the companies that you're working with?

Sunil: The places where we want to add the most value is taking on the, quote unquote, corporate finance role for a startup. Now many of these startups don't need a corporate finance role so to speak - like a company that's a hundred million dollar ARR will have a whole corporate team to do, help in the planning, the strategic planning on the financing side and then also raising capital or M&A.

When you come down to companies in that product market fit stage, which is anywhere from 0 to 10, maybe even up to 20 million ARR, they don't have the capacity to have that role in-house or even partially, but they need those skills because they have to be out there planning their growth. They have to have their KPIs nailed down, their financial KPIs nailed down so that they can make sure every dollar that's invested is generating meaningful ROI and contributing the KPIs that are creating enterprise value for these hyper-growth startups. And then once they start getting ready for the next round of financing, grooming up the business plan, the diligence materials, the management meetings, and of course, successfully organizing a capital raise. We don't do the work - we coach the entrepreneurs and the team to do the work and how to go about doing it. Having done that, as bankers in our last two decades or so, we know precisely what they need to do and not to do. There's no guessing involved.

Shiv: Right. One of the interesting things about corporate finance or just finance in general is that having full oversight over the entire business and it's passing through the balance sheet and the income statements and you're seeing the metrics and cash flow and all of that. So how plugged in are you getting to the other functions like, for example, sales and marketing or your annual budgeting and planning and actually guiding the prioritization in those domains? For example, like sales quota set up, or territory coverage, or how much pipeline coverage we need to hit our projections?

Sunil: So those are all topics we're intimately familiar with and get involved with, but we don't direct those. We bring in outside experts, depending on the entrepreneurial team. Some know - the nature of the startup is no team is perfect and they don't have it all figured out. We have what I call as three categories of founders. 

We've got the tier one, where they've had successful exits before, meaning - and successful in our world is they've created more than $100 million of equity value, right? So because - and multiple times, not just once. So there, our role is very much, we are your corporate finance team, call us when you need it, and you'll have the right answer with authority. 

Then you have the category of companies where the entrepreneur has built a business, but it didn't get to that $100 million equity value creation piece. And then the third is when the first time founders who are just this phenomenal career trajectory that makes us say, okay, this is a good founder market fit. In the second and third category of founder partners, it really depends where they need the most help. If it's corporate finance, we are there. If it's anything else, through our existing network of partners, our limited partners, our friends of the firm and executive network, we bring them the right people that they then have to work on recruiting into their board or their advisory board or some capacity.

Shiv: Got it. And on that side where you even have maybe people that have either been first-time founders or this is their next business, but they haven't built that hundred million dollar company, what are the areas that you find as being the most common places where they require coaching?

Sunil: So I think it again, you know, boils down to the focus that we have, right? So many of the founders, I would say the majority of founders we work with are technically extremely strong and they also understand, you know, their domain very well. So the place where they need most help is prioritizing the initial target market, understanding their ideal customer profiles. And once they start getting that initial signals of a good fit, running some discipline campaigns to generate outcomes that are needle moving, and then you've got to iterate, iterate. Now, there are companies on the other end of the spectrum where they really understand the domain. They know how to take a product to market. There it's bringing in the right, you know, technical advisory group or briefing on their technical team.

Shiv: Technical advisors, yeah. Well, let's talk about the TAM and the ICP piece because that seems to be, even in our experience working with a ton of companies, large and small, tighter definition of ICP and TAM is something that companies need to just get better at, right? So how are you guiding these companies through to the right definition, just to capture the right market opportunity and have the right context for a company? Just which direction are they pointed in? Because that's where everything flows from, right? The better your TAM and ICP work, the better your product marketing, the better your demand gen stuff, the better your product roadmap, the better your sales focus and efficiency. So I would love to hear your thoughts on that.

Sunil: Yeah, so I think the way to think about it is if we have to do too much work on that front, it's probably not the right founder partner for us. Because the guys we are working with know that piece, you know, extremely well. Now, there is always, you know, materializing it and you take it to market, it changes a little bit. We're there as sounding boards. But there are others - I mean, your organization probably does work in that area - but there are people out there who know this stuff cold. And so our way of helping them is to help them test, hey, do you smell blood when you talk to a customer? Is there a guy who I know their problem can be solved with what I have to offer? And not like I'm going to sell it to them. It's going to be obvious that what I'm solving for is this guy's pain points. That fit is - and you just have to keep it fitting it until you get it or run out of time or money.

Shiv: And how much of the work is actually setting up like that data framework, right? Because you can infer a lot of these ideas through those metrics. Like, for example, looking at your win rates by particular verticals can tell you if you're a better fit for one ICP or vertical versus another. Looking at your MQL to SQL or your overall conversion rates or your net revenue retention in certain markets can give you a pretty good idea of that. But we’ve found that a lot of companies don't have that full data infrastructure built. So as in your corporate finance expertise that you're bringing, are you helping the team set up that data driven framework?

Sunil: Not us directly, but we... Now, I think that's a combination of the corporate finance piece, which clearly we do, right? There are 20 parameters that matter, and three of them matter when the company is in that zero to one phase, and then one to five phase, and five to 10, and 10 to 20, and then beyond 20 million ARR. It's a combination of setting up the right CRM systems. And so, again, it depends on the phase. So at the first phase, the number of customer wins - because remember, we come very early, like almost pre-revenue. The data points that you have in the first two years are few and far between. And somewhere out there, those data points start accelerating. Until then, you're just experimenting. I mean, all those numbers that we talked about, the metrics, you can do it back of the envelope. Those are obvious in a call. Right?

As you start getting your 50th to 100th account, if it's less than 100K ARR sale or your 10th account onwards, if it's a larger sale, that's when all those HubSpot systems need to be put together. We don't help put those together. Our experts in the market do that. What we do is, what are the KPIs that we need to care about? In the framework that you talked about, there are three things that matter for us in enterprise SaaS. What's the cost of an MQL or SQL, whatever you want to measure it? What's the definition of that MQL or SQL that can't change? I don't care what the definition is, what I do care is the definition cannot change unless and then you have to redo the whole dataset. So what's the cost, what's the yield, MQL to sales conversion, and what's the time duration? I can look at 100 parameters. These are the only three that matter.

Shiv: Right. But what you're really trying to figure out is, how much does it cost us to bring in a customer? What's our payback period? And what's our sales velocity in terms of expectation to recovering that initial investment?

Sunil: And you know why that's most important?

Shiv: Well, you're just trying to figure out the rate at which you can deploy more capital into that business, right?

Sunil: And why. One more layer after that.

Shiv: To figure out how fast you can grow it to wherever you want to go to.

Sunil: Because in enterprise SaaS - and I can send you the research we've done and the materials we've done - over and over again, growth rate, gross margin, and size. And those three things correlate directly to these three things. Everything else is a means to an end. And you can have 20 different parameters. And trust me, our Excel models, that's the corporate finance side that we do. Once the data comes in, are we measuring all of this?

But to get the right data in and to get that right data in early on in the cycle - because you lose two to three years in that initial zero to two ARR phase, and we want that data captured sooner, not later.

Shiv: Right. When you think about the types of investments that you're putting money into, especially in these AI investments, trying to calculate some of these metrics like your payback period or your customer acquisition cost or even your gross margin and things like that, have you found that because they're earlier stage and they're still figuring things out, you have this initial period where you're losing a lot more money than actually having enough margin, or like you need to invest a lot more into getting to that product market fit or like that tipping point where marketing and sales is contributing more efficiently? And how do you look at that when you're evaluating the business in terms of its overall yield and margins?

Sunil: A lot of questions in there. There's so many things. Let's break it down. Let me try and tell you our framework and then maybe you can poke holes in it and ask questions. So, different stages, different phases, different tools. The initial phase - and it's very well mapped in the - at least in the Silicon Valley VC circles as to, for enterprise SaaS, in that initial phase of incubation, we support incubators, we mentor teams in incubators, we don't get actively involved just yet. Once they graduate from an incubator, they got to get to that 100, 200k ARR. That's when we start getting interested. And from there to - and that's everything until then is like angel investors, friends and family. They don't get a letter, but they get all kinds of names, and you can call it whatever. And now you've raised a few million dollars, let's say. Now comes the hurdle to get to that 1 million ARR. Until then, we don't even know what the ICP is and what data to track and all of that stuff. 

So. And then the next milestone from 1 million is that 3 to 5 million is the next milestone. That's when you do a good... So 1 million is your seed, pre-seed, all that stuff. 3 to 5 million is you're doing a series A. And then that should get you to 10 to 15 when you're doing a series B. And that gets you to 20 to 30 when you're doing a series C. And from that point forward - at that point, obviously, once it goes past 10 million, our current thesis, we take more of a passive role. Now ask me your question again.

Shiv: Yeah, well, I guess my question is, when you look at numbers like your customer acquisition cost, your gross margin, and your sales velocity -

Sunil: I think once they start going past the 3 million ARR, they start to gel. So we keep trying to track it, but we don't spend too much time sweating over it. 

Shiv: Yeah, sweating, exactly. 

Sunil: Let's say a founder-led sale. So like, you know, let's say you have first 10, depending on the size of the sale, first 10 to 10, first 50, most of the sales are happening because someone from the founding team is looking the other guy in the eyes and saying, “I'm gonna take care of you. All of this stuff obviously checks our box.” 

When you start getting that next phase after that, when you're going to hire people - I'd call it like off the street, but they're coming from different companies, off the street - and on a predictable basis, be able to know if this person is going to work for us or not, like maybe in a three or six month period based on metric, that's when those, it becomes a lot more metrics driven, or at least the initial phases of being metrics-driven. Now you're starting to figure out which channels are working better.

Shiv: Yeah, I guess the follow up on that around this question of gross margins is that companies like this, like especially AI companies, they require a lot more investment upfront, right? So are the companies that you're putting money in, are they burning capital? Or are they cash flow positive, even in the earlier stages? Or are you are they investing back into this business and in effect needing more capital injection to make it from one to three to five to ten to twenty five to hundred, you know?

Sunil: So typically, in the enterprise SaaS space, by the time you get to three to $5 million in ARR, the cost, it becomes like breakeven, unit profitable, et cetera. Now it's about that whole dollar-in, dollar-out type situation.

Shiv: Sure. Right, so you're saying even with these AI companies, you're seeing those principles hold where there's enough -

Sunil: I mean, the world changed in Q4 last year when OpenAI made their APIs open. And two, three quarters after that, the cost of AI has come down a lot.

Shiv: Right. And is that a good thing or a bad thing? Are you - from where you're -

Sunil: That's a fantastic thing, I mean…

Shiv: Yeah, it's a good thing. Yeah. Right. So from that perspective, your cost of operating is lower. And so you're able to have better margins. Is that, that's what you're saying? Got it. Got it. Yeah.

Sunil: That's a fantastic thing, I mean… so now the models that have been fine-tuned over the years for SaaS are directly applicable to AI SaaS.

Shiv: Right, right. Do you find that in going from that three to... Because what we've seen is if you're a three to five million, the path to getting to 10 or even 25, right, like there's this predictable model that you can, you know, dollar in, dollar out, like you were saying with this, with an expectation on the payback period and all of that. But if you want to grow faster, and AI companies in general have aspirations of growing faster, especially if they raise capital. So let's say your goal is to get to a hundred million, like you inevitably need to inflate your CAC and have longer payback periods. Do you find that to be the case or are you taking more of like a meticulous approach where you prefer to grow with profitability in mind there?

Sunil: So I think there are two elements, right? You'll have certain channels that you - by the time you get past that five million, there's certain channels that are tried, tested, and proven. And there are certain that you will continue to experiment with, right? And so - and that's why I'm doing all this foundational work upfront is that way more beneficial. Because you can kind of - and this is where we look at it really as a purely capital deployment opportunity or a problem, which is - as venture investors, our responsibility is to allocate capital. Which company gets more capital? And we try and inculcate, and we're not always successful, but if you want to talk to us, that's what you'll hear, is, prioritize where you're deploying your capital. So yes, you have to make - and look at it using the same investment models for building our channels because remember we talked about the three metrics and how they contribute to valuation. So if you’re trying other channels, but they're not working, you kill them. And you internally decide what that metric is. So you've got the main one and a second channel established by the time you got to three to five on a heavy pace. So bulk of your investments are going in, just growing that and optimizing that. The other one - you can't experiment with five new things. It just doesn't work that way. One - at the most, two. And if it works - if it doesn't work, don't.

Shiv: Right. This is actually a lot of the work that we do with our clients is when we come in and look at their data and look at their cost of acquisition and payback periods, it's usually clear that one or two channels are the winners and they need to invest more in those channels and they haven't done enough to maximize their returns. And then when you look at their other channels, there's a ton of inefficiency and budget that's being wasted that we often either cut or slash or we're reallocating to those more profitable channels just to make their existing marketing budget more efficient. I think a lot more companies would benefit from going through an exercise like that. We found often 30 to 50% in increased pipeline by just doing that reallocation exercise. Have you had a similar?

Sunil: It's amazing. Yeah, no, it's absolutely - that's why we think there's an opportunity for people like us and people like you is - so what we are trying to do is take that disciplined private equity growth approach. I mean, these methodologies work very well once you've gone past that 20 million ARR. You have a lot of resources, the founders or the principals of the company are not involved in all the deals. It's what we call, the standardization phase. So you've got the product market fit phase and standardization phase. And all we're trying to do as a fund is bring our domain knowledge, bring our operating background to try and bring those practices earlier and earlier, not so much with putting a lot of systems and processes in place, but just making those as instinctual decisions for our founders.

Shiv: Yeah, yeah, it's really embedding like a data-driven, finance-driven culture from the beginning, just so that you're growing sustainably and profitably through all the different growth stages that a company goes through.

Sunil: Yeah, and we're not the only ones doing it. I mean, you know, many people do it and once, you know, as you know, the VC model works through syndicates and co-investors and, you know, we kind of team up with others.

Shiv: Do you find a lot of competition at the stage of market where you're operating? Or do you find that given that you're also working with companies that are more down market, there's less institutional capital chasing those smaller investments?

Sunil: I would say the competition has always been there for the best assets, for the best pieces. We just don't like to compete and we typically don't. We did this even as an investment bank. We would not go in for many pick-ups. Same thing out here. We would not go in if you're just collecting checks. That's not our playbook.

Shiv: Right, right. And so how do you convince founders to go the route of working with an investor like you versus let's say a more traditional VC route?

Sunil: You know, there is no... if you have to convince, you're fighting the wrong battle. So the founder asked me that same question. I said, you know, if you didn't know that answer by now, I'm not going to change your thinking. Which is not saying that I expect you to know. I just know I can't change your thinking. So it's the reason why we have, you know a certain allocation of our capital to repeat successful entrepreneurs and others too, even first time entrepreneurs.

Shiv: Right. But in terms of just internally how you think about your firm versus what's out there and available to entrepreneurs, I'm sure you think about, okay, yeah, here's what separates us versus these other investors. So what would those be? Is it more just this responsible, metrics-driven approach where you're not just burning capital and growing more responsibly?

Sunil: I wouldn't say that at all. I would say the reason why we get invited and we get allocated capital in the most competitive of deals possible is two fold. Our edge is we are okay writing small checks. We don't need to write a five million dollar check or two million dollar check or dominate the round etc.

We bring in our corporate finance, M&A, investment banking advisory expertise that we've honed and perfected for this purpose over decades. And you don't have to engage with an investment banking firm to get the advice that moves the needle just with a phone call. And so our motto that's working for us is ‘take our money and let us work for you’.

Shiv: Got it. Got it. So they're, they're not just getting like a banker in the process. They're getting like this finance partner piece that you mentioned, which a lot of companies -

Sunil: Our seat on the table is the corporate finance role, whether it's thinking about financial planning, capital raising, preparing for the next round raise, M&A opportunities. When it comes to M&A, the preparation for an M&A is a two-year cycle. So you might as well be prepared at any time to be acquired, because the best companies do get acquired, rather than come to a point where you have to be in a selling position.

Shiv: Right.

Sunil: And to have that voice on the table - and we've co-invested with all the leading VCs in the valley - but our seat on the table is for the corporate finance expertise that we find even the best of the best VCs don't necessarily have. So the best VCs have a lot of partners, right? So the guy who's on our deal may not have that perspective or expertise. And -

Shiv: Yep.

Sunil: We are fairly authoritative on what we mean.

Shiv: Yeah, yeah, no, I completely agree. We've worked with a bunch of investors where corporate finance or - is an area that they're always looking to fill need more partnerships around. So the fact that you're bringing that to the table becomes a differentiator for why you're invited into deals. So I actually do understand that. And then from your portfolio of experiences, there's some clients that we've actually worked similarly on - and you work with some really large investors, given the size of your firm. So I think that's awesome.

I think that's a good place to stop the episode, but before we do, given your corporate finance perspective, are there any particular books that you encourage founders to read within this area to get more educated and understand how they can leverage finance as one of those levers inside their businesses?

Sunil: Do I encourage founders to read certain books? No. I have curriculum for my analysts. But I think that's too much for founders. I think - so we invest largely in tech and Silicon Valley companies. I think many of the founders that we work with early-stage don't even fully understand how the three financial statements work.

So if I recommend anything to them, it's like just get the grounding in just basic accounting and finance, and I wouldn't send them towards any books. This is a very academic topic.

Shiv: Yeah, I mean, basic GAAP principles. So yeah, understood. Okay, well, I think that's great. If people want to learn more about True Blue and what you do, where's the best place they can find more information?

Sunil I think our website still needs updating, but I'd say LinkedIn and the posts that we do out there is best, but I'm always available to take a first call with any entrepreneur who's trying to build a company, whether or not it's a good candidate for us to invest. I love to build that relationship with people who are building companies.

Shiv: Awesome, Sunil. This is great. Thank you so much for doing this and sharing your wisdom. I think it's a very different type of episode and hearing about the value that you're bringing on the finance side. So thanks so much for coming on and sharing that insight.

Sunil: Absolutely. Thank you for having me.