Pat Matthews, founder & CEO at Active Capital, walks through his investment decisions with three startup stories. Learn from his career as a pioneer in B2B SaaS entrepreneur in the late 90s and an active angel investor in 100+ startups before he became a full-time VC.
Pat Matthews, founder & CEO at Active Capital, walks through his investment decisions with three startup stories. Learn from his career as a pioneer in B2B SaaS entrepreneur in the late 90s and an active angel investor in 100+ startups before he became a full-time VC.
I have spent my career building companies in what I like to call underdog cities across the country. And I just believe that a lot more of that is going to happen over the next few decades. I also believe that there are just way fewer investors in cities outside of the Bay area. I like to go where others are not. And so I'm very much focused across the country.
[00:00:26] Gopi Rangan: You are listening to The Sure Shot Entrepreneur - a podcast for founders with ambitious ideas. Venture capital investors, and other early believers tell you relatable, insightful, and authentic stories to help you realize your vision.
Pat Matthews is the founder and CEO of Active Capital, a venture capital firm based in Texas focused on leading seed round investments for B2B SaaS companies located outside of Silicon Valley. Prior to starting Active Capital, Pat was an entrepreneur, operator, and an angel investor. Pat's career started in 1999 when he dropped out of Virginia Tech to start a dot com startup with some of his best friends and college roommates. After the dot com bubble burst Pat and his team persevered through the years of economic downturn before creating webmail dot us, a $10 million dollar B2B SaaS company that was recognized as one of the fastest growing private companies in America by Inc magazine.
In 2007, Webmail was acquired by Rackspace where Pat worked as an executive on the senior leadership team until 2013. Pat has invested in nearly a hundred startups and is an active board member at the Apex Center for Entrepreneurship at Virginia Tech, Venture for America in San Antonio and several active capital portfolio companies.
Pat lives in San Antonio with his son, Mason. Welcome, Pat.
[00:02:04] Pat Matthews: Thank you. Happy to be here.
[00:02:05] Gopi Rangan: Tell us about yourself.
[00:02:07] Pat Matthews: Well, first of all, I appreciate the introduction. You covered a lot of my career. I would define myself as an entrepreneur-turned-investor. Like you mentioned in the introduction, I started a company with some of my best friends from college back in 1999 that we ultimately turned into a SaaS company, really before SaaS was even an acronym.
We grew that company up and ultimately we were acquired by Rackspace, where I spent time helping to build the Rack. After leaving Rackspace, I just started investing in all kinds of companies, really, B2C, B2B, pretty much everything under the sun. And from there I tightened up my strategy and ultimately crossed over to the dark side and started Active Capital back in 2017, where like you mentioned, we're very focused on B2B SaaS companies.
[00:03:02] Gopi Rangan: So you turned around a destined to fail dot com startup and turned it into a B2B SaaS business. The business exited, but you stayed with the team and then that company got acquired by Rackspace.
[00:03:15] Pat Matthews: That's exactly right. Yes. I was CEO of the company. Our company's name was Webmail. We hosted email for businesses all over the world. This was pre Gmail when we got started. Gmail ultimately, especially as they launched Gmail for business, became a much bigger competitor, but we grew through it all and we thrived through it all. I just think the market really opened up and especially when Google got really involved.
But then we were still growing, growing very fast actually, and ultimately got acquired in 2007 by Rackspace, and we all joined Rackspace. We didn't look at it as an exit or a way to get out. We looked at it as, you know, kind of 2.0 of our journey. We felt that it would be better to partner with a larger company with more resources and one that we had a lot of respect for.
And so I ended up joining the executive team of Rackspace and spent six years there and ran everything software as a service, cloud computing, and ultimately mergers and acquisitions. In late 2013, I left. When I joined Rackspace we were at $300 million in revenue. When I left, we were a billion and a half. I didn't really have anywhere to go.
I just couldn't make the difference that I wanted to make it Rackspace anymore. So, I left Rackspace and I really just started angel investing. In fact, I was angel investing my last couple of years at Rackspace, you know. I kind of found myself as an executive in a big company and my way to stay connected to the entrepreneurial world ended up being both through my job. I mean, I was working with lots of startups, you know, running the Rackspace cloud, but I also just wanted to be an investor in many of them. And so, that's where I really started investing in startups and ultimately kind of built up a big angel portfolio, learned what I liked and didn't like about angel investing, spent a lot of time thinking about where I wanted to spend the next phase of my career. Ultimately ended up starting a venture capital firm, which is Active Capital. And today, Active Capital is a venture firm focused on leading seed rounds for B2B SaaS companies outside of Silicon Valley.
[00:05:08] Gopi Rangan: Well, it's fascinating. You started in the B2B SaaS world before the phrase B2B SaaS existed, and you've been entrepreneurial side of things for many, many years.
That's a big change from being an entrepreneur to a VC. Are you fully settled in the new VC type of role? Or do you feel like the base of your DNA is still entrepreneur?
[00:05:30] Pat Matthews: No, I'm very settled into it. I mean, it took me a few years to really find my role and passion in the investing and VC world.
One of the things that I'm really glad I did is took my time before starting a venture firm and, and really using my own money, not just to build up a great angel portfolio, but also I learned a lot about the type of investing that I like to do, the type of companies that I like to invest in, and then ultimately what my relationship is with the founders.
And so I'm very glad I took my time to do that. It really helped me find my path in venture.
[00:06:05] Gopi Rangan: I know that you're based in San Antonio, which is not a hub for venture capital. Austin is certainly a reasonably sized hub. Where are your companies located? Are there certain geographies that you prefer?
[00:06:19] Pat Matthews: Certainly we invest outside of Silicon Valley. I mean, that is really our main focus or our mantra, if you will. And by the way, I have nothing against Silicon Valley. I love San Francisco. I love the Bay area. I just know that there's a lot of investors out there and I have spent my career building companies in what I like to call underdog cities across the country.
And I just believe that a lot more of that is going to happen over the next couple of years. And I also believe that there are just way fewer investors in cities outside of the Bay Area. And so I like to go where others are not.
I would say if there is one area where we have our most concentration of investments, it's definitely in Austin. However, we truly are all over the map. I mean, we've got companies in Salt Lake City, Austin, San Antonio, Florida, Virginia, Kansas City, Minneapolis. We really want to be thought of as a B2B SaaS firm, more so than a firm that is tied to any geography.
[00:07:18] Gopi Rangan: Is there any advantage, any special things that you see in other cities that you're able to take advantage of?
[00:07:24] Pat Matthews: First of all, being focused on B2B SaaS really maps to my background as an entrepreneur, and I think that allows me to be a more contextually relevant investor and advisor to the founders and CEOs that we invest in.
I also believe that most founders, especially at the very early stages of a company, would prefer to raise capital from somebody that has walked in their shoes versus somebody that has not. And so I do think it gives us a competitive advantage from a deal flow perspective, having credentials and credibility with the founders from the get go. I mean, ultimately I want to be the chief advisor to the founder and CEO and you really do have to earn that. But I think that starting out in the right place is very, very helpful. And then another thing that it does is, as we build a portfolio of B2B SaaS companies, there's a community that is starting to form around that as well.
And so, that's something that we want to invest in more in the future as our portfolio gets bigger. But you know, the reality is that most B2B SaaS companies go through similar challenges. They have similar opportunities. They have similar challenges. We are really trying to build a community of B2B SaaS entrepreneurs that can help each other out and support each other.
I believe over time, that is going to be a very powerful attribute of our firm.
[00:08:49] Gopi Rangan: So can you give an example of a company that you recently invested and walk through the story of how you met the entrepreneur? How did you start building a relationship with them?
[00:08:58] Pat Matthews: Yeah, absolutely. A few examples come to mind.
Maybe I can give you three examples that are all very different. One that we recently announced another one that recently raised a series A and one that I won't name, but that we're under term sheet on right now.
[00:09:13] Gopi Rangan: Okay. We're getting some insider stories here.
That's awesome.
[00:09:17] Pat Matthews: Absolutely. Let's go through it.
One of the companies that we most recently announced is a company called YAC, Y A C. So you can go to Y A C dot com. And YAC is an audio messaging platform for teams. Really great product, really exciting company. We invested in them in Q3, Q4 timeframe, somewhere around there. They're based right outside of Orlando, Florida.
We actually found them on Twitter. They are a team that tweets a lot. We sourced them on Twitter. In fact, Chris from my team originally found them, connected with them. We had several phone conversations, zooms. We YACed back and forth across their platform quite a bit. I typically in a sort of normal world, I like to fly out and meet the founding team, which I did. I really just love the team's vision, but also t he product that they had built. We really look for companies at the seed stage that have made a lot of progress without a lot of capital.
Sometimes that progress can be mixed across product revenue or other variables. Sometimes you'll see great product, not a ton of revenue yet. Sometimes you'll see a lot of revenue. but The product's got some catching up to do. In this case, the team really developed just amazing, amazing product.
Why were they able to do that? What do you think worked well for them?
Well, number one, they are a team with a very keen eye for design and UX and user experience. In fact, they had been running for many years, a design firm. So, you know, a bit of a services company, if you will, very focused on design.
They're very much remote distributed team as well. I think a lot of the vision for YAC came from both their design backgrounds, as well as their building remote teams. Through all of their design work over time, they've got, you know, big network of people that they've been working with on the engineering side as well. They raised a little bit of capital. I mean, they had gone through a small accelerator and ultimately just were able to build a product without having to spend too much money doing it. I was just very impressed with that, very impressed with their execution, very impressed with the product, really liked the team and felt they were the ones to really build this product out.
We ultimately ended up leading their seed ground.
[00:11:31] Gopi Rangan: It looks like the team led with their strength and their strength was in design and that really shows in the success.
[00:11:37] Pat Matthews: Yes, very much so.
[00:11:39] Gopi Rangan: So you mentioned there are three examples you were going to talk about. YAC was one of them.
[00:11:44] Pat Matthews: Yeah, I think YAC is a good recent example. And you know, today I think YAC is more important than ever. They had sort of been very visionary around what future of work products are going to look like. The pandemic happens to be really accelerating what they're doing. And so I think they're a great example of the type of company that we like to invest in.
The second company I was going to mention, is a company called Living Security, which is based in Austin. I met Living Security and Ashley, who is the CEO over there, I met her probably two years ago.
A little bit of a different story. We had connected through a place called Capital Factory, which is an accelerator and co working space in Austin, Texas. They call themselves the center of gravity for entrepreneurship in Austin and really all of Texas now. This is one of the things that we do is we spend a lot of time with accelerator programs across the country, but especially in our own backyard in Austin. Ashley and I had connected. I'm pretty sure she reached out to me to sort of get advice. She actually still had a job at the time. And her and her husband drew, we're still full time employed at their respective companies. And she kind of pitched me on the idea and you know, I liked it.
I mean, she was very passionate about what they wanted to build and we just had agreed to stay in touch at first. I mean, we don't really invest at the idea stage. We like to see more progress than that, whether we're investing at the pre-seed or leading the seed.
[00:13:09] Gopi Rangan: Not every conversation needs to be a pitch discussion, whether at the end of the meeting, you decide whether to invest.
Some of these conversations are just to brainstorm and then you decide to stay in touch.
[00:13:20] Pat Matthews: That's exactly right. And we did just that, you know, she did a great job of sort of picking my brain in terms of what our firm looks for and the types of companies that we like to invest in. And ultimately she was just very tenacious and followed up consistently.
Ultimately, her and her husband quit their jobs and started Living Security. They did a lot of customer discovery. They built up a huge pipeline of enterprise customers; in fact, one of the best pipelines of enterprise customers I've ever seen for that stage of company. Ultimately, they raised a pre seed round and we put a little bit of money into their pre seed, which is also something that we like to do.
In cases where we can put a little bit of money into a company and get to know the founders and build a relationship and kind of be there when they go out to raise a bigger seed round. We really like to do that when there's the opportunity to do so. That opportunity does not, always present itself. Like with YAC, it did not present itself. But with Living Security, it did. We put a little bit of money in the pre-seed and we started talking monthly and whenever things came up. We built a great relationship and I was super impressed with their progress. Ultimately, we led their million and a half dollar seed round.
They continue to grow and do well and perform. In fact, they closed their series A in the middle of pandemic. That's another point. Great example of a company we invested in. It's a little bit further along now.
[00:14:37] Gopi Rangan: This is great. You've given, given two very meaty examples, and you're going to talk about a third one that is still in term sheet situation.
What kind of questions do you ask entrepreneurs, especially when you first meet them and you don't know them well?
[00:14:51] Pat Matthews: I mean, I think at first I just really tried to understand what they're building, why they're building it. I like to understand what led them to wanting to build what they're building. And, you know, a lot of it is just around the vision and the product itself.
Ultimately over time I get to know them a little bit better.
[00:15:10] Gopi Rangan: If you were to tell entrepreneurs, here are a few things that they can do to make it easier for you. What are some things that they can do to prepare? Like what have they done well that made it easy for you to get to know them better, dig deeper soon?
[00:15:24] Pat Matthews: Yeah, I'll talk to that and then I'll give you the third example because they kind of play well together. So, you know, one of the biggest things that I think entrepreneurs need to get better at and, and looking back on my time as a software entrepreneur, like I realized that I missed the boat on this as well, is I think entrepreneurs need to get better at.
pitching and researching and then ultimately pitching investors and VCs that align, whose thesis aligns with what it is the entrepreneur is building. I think that oftentimes entrepreneurs see VCs as sort of one big category of thing, if you will, whereas, I'm very focused on B2B SaaS, you are very focused on insurance tech, then there's different investors who will cut across different industries, but also different stages.
And so I just think that the more the entrepreneur can research the investor and map to their thesis, and then communicate how their idea or their company maps to their thesis and the stage of investment that they like, the more success that you're going to have. Entrepreneurs are taught that it's really a numbers game and you just got to fire out as many emails as you can and ask for as many introductions as you can.
And to some degree, I think that's right. But I think the more that you can map to the thesis, the better. One perfect example here. On June 2nd of 2020, I got an email from an entrepreneur in Boulder, Colorado. The CEO did a great job of writing the email, but basically there's, there's no real magic to it.
I mean, he introduced the company. He had done research on us. I mean, all the way he found us, since he'd gone out and he was searching for a lead investor and he went to PitchBook and CrunchBase and all in Google and all these different resources to research lead investors that will invest in B2B SaaS companies.
That's how he found us. He runs a seed-stage B2B SaaS company with $20, 000 a month in monthly occurring revenue and a beautiful product. He did a great job of, of outlining all that in the email. And of course that's exactly the type of entrepreneur that I want to talk to. And so we immediately connected and on zoom, I think we did a zoom at first and I really like what they're building. I like how they're building it. I love the market they're going after. I mean, it's clearly enterprise software, really good traction. I mean, it's very early, you know, it's not like they're a multi million dollar company, but they've got the makings of a great company.
And that's exactly what I want to talk to. I'm always happy to talk to lots of different entrepreneurs across different industries, but in terms of investing. Through active capital, I really want to talk to B2B SaaS entrepreneurs who are building great things.
[00:18:12] Gopi Rangan: This is very interesting. A lot of VCs talk about, come to me with a warm introduction.
I make myself visible. So there should be a way for you to find someone in my network. If you can't even do that, then how are you going to build a business? That's the attitude many VCs take. You take a completely different approach. You are like I love cold emails. And if you come to me having researched my firm and what I do, and if it's a fit, you spend time with the entrepreneur, you even end up making an investment.
That's very refreshing to see.
[00:18:43] Pat Matthews: Yeah, I bet you half of our investments. I mean, one day I need to crunch the numbers on this, but I bet you half of our investments have been from cold outreach, as in entrepreneurs cold emailing us. I don't mind cold outreach at all. I mean, if I were an entrepreneur, I'd spend more time doing it.
Warm referrals are great. If you are just trying to search your way through LinkedIn to get a mild connection to me. I'd actually rather you just reach out directly. In fact, we have just sort of a mantra. I want to call it a policy. I don't know if you'd call it that, but we respond to everybody.
And so, I'm not one of these people with a thousand emails in my, unread emails in my inbox. I respond to every email I get. I'm at the inbox zero 10 times a day. I view that as just being part of the job and maybe it's an advantage for me too because I do hear how it is very rare for a busy person to be at inbox zero, which also means that they responded to everything, not just cleared out their inbox.
So that's how I do business.
[00:19:41] Gopi Rangan: Yeah. I strive to be at inbox zero as often as I can, but it's a challenge. It's definitely helped me build stronger relationships with people. And I see that that is your superpower. When you respond to all these, every individual emails, you begin to build a good relationship with a larger community.
You make it sound like this is all so easy. You started this B2B startup in the middle of a dot com boom and then bust. You sailed through, went really well with Rackspace, then you smoothly transitioned to the venture side. Is there anything that's difficult for you?
[00:20:19] Pat Matthews: Our story and my story, I think is anything but easy. With our startup, for example, number one, our dot com failed and when our dot com failed, we spent two years pivoting from a failed dot com to the makings of a successful B2B SaaS company. During those two years, my partner and I each ran up over a hundred thousand dollars in credit card debt. In addition to that, I'm not a software developer.
And so while we were pivoting.
[00:20:48] Gopi Rangan: You're still in your 20s, right?
[00:20:50] Pat Matthews: Oh, yeah, I was definitely still in my early 20s. And not only that, but I had to step away from the office most days to work part time jobs just to make ends meet. In fact, one of my part time jobs for an entire summer, I sold books door to door in the heart of Southwest Virginia just to be able to service my credit card debt. We actually had quite the struggle in getting our business off the ground. I can imagine many other entrepreneurs going through what we did and, and sort of the years that we spent really turning our business into a success story.
And I'm really proud of that. You know, I think in many ways we probably should have just shut down and regrouped but we didn't. We persevered and it took a lot of time. It took a lot of effort. It took a lot of sacrifice. It took a lot of debt but we ultimately made it happen.
[00:21:42] Gopi Rangan: Yeah, I've seen that 'never give up' attitude in you many times. And it shows with Active Capital as well, how you've persevered to build this business. This is fascinating. I'm sure we can spend more time talking about your stories, but we're coming to the end of it. I want to ask you about a community involvement, a nonprofit organization that you're passionate about.
Is there one that you would like to talk about?
[00:22:06] Pat Matthews: Yeah, one that I've been involved with for a decade now in several different capacities is Big Brothers Big Sisters. And so, I ended up getting involved in Big Brothers Big Sisters in Virginia right before I made the move to Texas.
And then when I made the move to Texas, I ended up joining the board of our regional Big Brothers Big Sisters, which I did for probably six years. I rolled off the board last year. Um, but one of the things that I have been doing the entire way through is I've had a 'Little', and so in fact, I've had two 'Littles'.
One is probably now 20 or 21 years old and has moved off and sort of fleed the nest, if you will. And now I've got a 'Little' that is 12 years old here in San Antonio, who I spend time with and mentor, and actually he's become really good friends with my son as well. And so I would say that that is one organization that I've had a lot of passion for over the years.
[00:23:05] Gopi Rangan: Oh, this is great to hear. We covered a lot of territory all the way from your early part of your career to how you're running Active Capital. It's always great catching up with you, Pat.
[00:23:14] Pat Matthews: Yes, absolutely. Well, thank you, Gopi. And call me for anything. Okay.
[00:23:17] Gopi Rangan: Certainly. Yes.
[00:23:18] Pat Matthews: Same.
[00:23:20] Gopi Rangan: All right.
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