Today at Samaipata we are extremely happy for our portfolio company Spotahome. They’ve just achieved a very important milestone: raising a $40m Series B led by KPCB. Fundraising is never easy, especially when it comes to Tier 1 growth stage funds, where the bar is extremely high for candidates, typically reserved to those meant to be +1bn USD companies. That’s why I’d like to say HUGE congrats to the Spotahome team, and especially to Alejandro Artacho and his co-founders. They’re the ones who deserve all the credit, the ones that commit their lives to such a great feat, the ones on the trenches, riding on a rollercoaster of joy and pain every day. . Investors are just those special guests lucky enough to be invited to the party.
Alejandro and team, you have done an amazing job, and the best is yet to come!
We’re also happy for the European ecosystem, as historically there has been a lack of growth capital in the region making these kind of bold bets aiming to create global leaders out of Europe . (With all due respect to the recently raised -quite sizeable- c. $ 1bn European funds such as Atomico and EQT)
Finally, we’re also super happy for Southern Europe, especially for the booming Spanish start-up ecosystem. The speed at which it’s evolving is amazing. I remember that back in 2011 (just 7 years ago!) when we founded La Nevera Roja, there was a scarcity of specialized funds and a lack of an organised investor ecosystem. Some of the players had a weird sense of autarchy making it extremely difficult or even impossible for founders to raise new money from international funds. It’s easy to illustrate this with numbers: total VC funding in Spain, back at that time was c. € 200m/yr , in a € 1,3 Trillion economy… yes, you read correctly! Well, fast-forwarding 7 years, the ecosystem has flourished and there is a whole new generation of ambitious and talented founders and an increasingly sophisticated investor base trying to catch-up with this dynamic and rapidly growing entrepreneurial ecosystem. In 2017 the € 1 Bn/yr in VC funding milestone was surpassed in Spain (x5 in ~7 years) and Tier 1 growth investors, such as Kleiner, Perkins, Caufield and Byers, are betting on Spanish-born players as Spotahome. International money flows in and local investors acknowledge the importance of being European or global, not local.
Well, let’s get started. As an invited guest to this incredible ride, I’d like to share 4 things we’ve learned from Spotahome so far:
1.The importance of not confusing Vision and Go-to-market (GTM), a.k.a. the “Vision — GTM trap”
There’s a very common confusion between:
i) Vision (and/or mission), a.k.a an organisation’s reason for existing and its long-term goals, and
ii) What is usually called Go-to-market, a.k.a the «How» you get there, especially in the very first stages.
Many times as VCs we meet founders of companies that are operating in a given segment, city, node, hub, etc. and we think the TAM (note this buzzword indicating Total Addressable Market) is too small, that it’s not a VC business, without realising that, the market they’re addressing is just one step of the go-to-market, just the first node they are saturating before moving to the next one.
A classic example (sorry, it’s been used so many times!) is Uber black cabs in San Francisco. Initially, one might have thought that the market was very small without realizing the potential of the vision, i.e. addressing mainstream cabs market globally or even intra-city transportation.
It sometimes works the other way around: VC meets a brilliant founder with an amazing vision, but is being executed altogether, at the same time from the very first minute. e.g building Uber/ Airbnb globally and for premium + mainstream users in the first place, well that’s probably not gonna work… That’s what we call the Vision — GTM trap.
To me, as a VC, the way to figure out if the current TAM is just a first node (just a stage in the GTM) or the real TAM is mainly a function of 3 variables:
i) Founder´s ambition: probably one of the most relevant ones. Not every individual is created equal, some people want to change the world while others just want to build a lifestyle business. Both options are perfectly fair but are relevant when assessing the relevant TAM.
ii) How many capabilities, assets and skills built when developing the first node are transferable to the next one: E.g. can you use the same playbook to saturate the subsequent node? How much resources will you need to duplicate? Are the skills, abilities, etc needed the same ones? If none of the former are transferable when moving to the next node, you’re just building a new business in a new market, so not really meaningful to assess your relevant market.
iii) How fast-growing is the niche that you’re addressing at the very beginning: Here’s another cause of confusion, it happens when there’s a drastic change in consumer behaviour. The current market is small but growing at an incredible speed, so you don’t care how small it’s today, at the end of the day the value of a company comes from the discounted future cash flows, not today’s. So the relevant market is not today’s.
In the case of Spotahome it was definitely a tricky one, and we discussed it extensively when we invested, going back to each of the points mentioned above:
i) Ambition: well, this one was easy to assess, founders are extremely ambitious, they just want to do something memorable, and that’s great!
ii) Regarding transferability, we thought the playbook can be applicable to. i. every GEOGRAPHIC market in the world and to ii. other verticals such as the sales market
iii) Regarding the growth pace of the initial node, those willing to close a real estate transaction fully online, here it was most tricky one, most difficult to asses but our view was that was going to be the future mainstream behaviour in the market.
So all in all, while at the very beginning, users were mostly students in Spain/Europe, we were convinced that only represented the very early adopters, (fairly small TAM) and taking into consideration all the above, we think that the real long term market is the Global Real Estate market, which is a multi-trillion dollar industry, just HUGE.
2. LTV confusion. Demand or supply calculations
Analyzing unit economics in marketplaces can be very tricky, especially where you need to build different sides of the marketplace and all of them could be subject to LTV:CAC analysis (more info on this here).
First, you need to bear in mind that the use of the LTV:CAC formula is especially -if not only- useful when i) there are relevant costs of acquisition per unit and accumulated (demand or supply side units) and ii) there’s meaningful retention of that unit acquired in the marketplace overtime. In case there’s no retention, CAC should be considered as a purely negative contribution margin per order.
Uber Eats is a good example: In order to build its marketplace, Ubereats has to acquire i) User’s (demand) ii) Restaurants (supply users #1) and ii) Couriers (supply users #2). Each of those components should have their own CAC and LTV as each of them will imply relevant acquisition costs and will be retained by the platform over time. LTV:CAC has to work.
In the case of Spotahome, the liquidity is reached when there are enough landlords/properties (supply) and tenants (demand). In this supply driven marketplace where demand retention is (initially) low, it makes much more sense to look at retention and LTV:CAC figures for the supply side (landlords) rather than for tenants, at least in the early days of the business. In this case, at the beginning, the demand side retention can be low, and all in all, if you look at LTV:CAC on the demand side, you could think the business is not a good one. But if you look at the extremely sticky supply and the fact that demand becomes more and more sticky overtime, as a consequence of the expansion to new cities… well the business suddenly seems incredibly promising. This was in fact one of the reasons why we fell in love with Spotahome and decided to invest.
3. Ambition: go big or go home
Well, not much needs to be explained here. When Alejandro told me he was planning to head to Silicon Valley to raise the Series B, to fight back their well funded European competitors. I just thought: F**K yeah!
4. Be humble and be grateful
In a world where ego is so common and being humble and grateful is sometimes seen as being weak, it’s great and I really love to see entrepreneurs thanking the people around them for their support, faith and help from the very beginning. Being an open-minded entrepreneur, willing to learn, ready to fight hard but being humble enough to learn and be grateful, is also a key ingredient of the secret sauce of success. It´s worth highlighting that every single person we introduced the Spotahome team to (be it investors, job candidates, potential mentors…) mentions somehow this point. And we couldn't´t agree more
So I’ll close this post quoting Alejandro and one of his favourite Giphy ;)
“Get ready for this incredible Mission as we are all jumping on this Rocket together! The World needs you, let’s make something hugely epic TOGETHER! “
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