I am not an enterprise IT person, but I have made a few investments in the space and will definitely do more. As a small investor, the formation of these types of companies is quite different than what the broader startup/tech population is exposed to for SaaS and consumer-facing businesses. Often in enterprise IT and infrastructure startups, there are real barriers to starting up — the founders need to be of a certain caliber, there likely needs to be some tech breakthrough or promise of one. the dollar requirements out of the gate are much steeper, and the question of sales (distribution) can make or break the deal.
As a result, these investments form with very different characteristics. It is not uncommon for an elite team of new founders to raise $5m+ just on a slide deck, pre-product. The likelihood of returns generally in this space are much higher than consumer, but the breakouts aren’t as common or high-flying, though we are on the verge of seeing a company like Nutanix go public soon and hit valuation numbers that very few companies see.
As I started Fund II about 18 months ago, I was introduced to the founders of Datos IO by one of my LPs. In fact, this LP has sent me tons of deal flow that I wouldn’t have ever seen. That’s only half of what’s cool about this; of course, I am not qualified to evaluate these businesses on a technical level, so how do I go about getting conviction to invest in companies like Datos.io?
One of my biggest lessons — one of many, so far — is that everyone assumes “investor diligence” is done (if at all) in a somewhat similar manner. In reality, investors perform diligence and arrive at their own point of conviction through a variety of methods. Some make market maps; some call all references and customers; some hire technical savants to help them birddog the technology’s worth; some just wing it. In this case, I conducted “network diligence” by talking to three of my close friends who are all deeply thoughtful about enterprise IT and infrastructure, and I walked through this opportunity with them.
After testing my network and spending lots of time with the two founders, I was able to gain conviction in the caliber of the team and technology. And, so far, that process worked just fine as Datos IO went on to earn many term sheets from some of the world’s best technology investors, ultimately selecting Lightspeed as its Series A lead, a firm with a string of hits in infrastructure. A better understanding of the company’s offerings verifies what Datos’ investors already know: That the company, which solves recovery issues for distributed databases, is graduating pilot customers to real customers quickly, by providing a consistent view of the data across their infrastructure for recovery needs.
This example provides another reason why I feel investing is such a great fit for me personally. Being a small investor and with a network to help around the edge, I can learn much more about the enterprise IT sector in a shorter period of time. Though my knowledge in this domain will never be on par with those who focus in this area, for now I enjoy having the flexibility to explore new sectors and make investments broadly. In part, it helps me write pieces like this called “The Enterprise, In Lay Terms,” which has turned into one of the most-visited posts on my site. For 30 years, scale-up relational databases ruled the client-server world, where companies like Veritas provided data management tools. Today, distributed applications (IoT, Mobile, Social, Cloud) call for a new data-centric world where five of Top 10 databases are open-source. The stellar team of researchers and operators at Datos IO have not only built and developed this new technology and architecture, but they’ve put in the hands of large corporations who are lining up to harness their technologies. That is no small feat, and I am proud to be a very, very small part of the team’s journey.