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.
The Sure Shot Entrepreneur
Pat Matthews - Startups in underdog cities are looking for good investors
Pat Matthews: [00:00:00] 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. And I also believe that there are just way fewer investors in cities, outside of the Bay area. And so, you know, I like to go where others are not. I'm very much focused across the country.
Gopi Rangan: [00:00:29] You are listening to the Sure Shot Entrepreneur. The 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, 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 .com startup with some of his best friends and college roommates. After the.com bubble burst, Pat and his team persevered through the years of economic downturn before creating Web Mail.us the $10 million B2B SaaS company that was recognized as one of the fastest growing private companies in America by Inc. magazine. In 2007, Web Mail 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.
Pat Matthews: [00:02:10] Thank you. Happy to be here.
Gopi Rangan: [00:02:12] Tell us about yourself, Pat.
Pat Matthews: [00:02:15] 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 and ultimately, we were required by Rackspace, where I spent a long 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. From there I tightened 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 in B2B SaaS companies.
Gopi Rangan: [00:03:12] So you turned around a destined to fail .com startup and turned it into B2B SaaS business. The business exited, but you stayed with the team and then that company got acquired by Rackspace.
Pat Matthews: [00:03:25] That's exactly right. Yes. I was the CEO of our company. Company's name was Webmail. What we did is we hosted email for businesses all over the world, and this was pre-Gmail. When we got started, you know, Gmail, ultimately, especially as they launched Gmail for business became a much bigger competitor, but we grew through it all and we thrive through it all. And you know, I just think the market really opened up and especially when you got really involved. Then we were still growing, growing, growing very fast, actually. Ultimately got acquired in 2000 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 and what, you know, 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.
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 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 it 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 during my last couple of years at Rackspace. 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. That's when I really started investing in startups and, 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. So that was about three years ago. And today active capital is a venture firm focused on leading seed rounds for B2B SaaS companies outside of Silicon Valley.
Gopi Rangan: [00:05:29] That's fascinating. You started in the B2B SaaS world before the phrase B2B SaaS existed, and you've been the 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, the, your base of your DNA is still entrepreneurial?
Pat Matthews: [00:05:52] 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 in VC world. You know, one of the things that I'm really glad I did is, I took my time before starting a venture firm 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. I think it really, it really helped me, you know, find my path and venture.
Gopi Rangan: [00:06:32] 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 at? I know that you focus primarily outside Silicon Valley but are there certain geographies that you prefer.
Pat Matthews: [00:06:51] So certainly we invest just outside of Silicon Valley. I mean, that is really our main focus or our mantra, if you will. 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. 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. And I also believe that there are just way fewer investors in cities, outside of the Bay area. So that's, you know, I like to go where others are not. So I am, I'm very much focused across the country. 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 SAS firm, more so than a firm that is tied to any geography.
Gopi Rangan: [00:07:57] Is there any advantage, any special things that you see in other cities that you are able to take advantage of?
Pat Matthews: [00:08:03] I mean, so first of all, being focused on B2B SaaS really maps to my background as an entrepreneur. 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 the very early stages of a company would prefer to raise capital form from somebody that has walked in their shoes versus somebody that has not. I do think it gives us a competitive advantage from a deal flow perspective. I think it gives us a competitive advantage from, having credentials and credibility with the founders, you know, from the get-go. I mean, ultimately, I want to be the chief advisor to the founder and CEO, and you have to, you really do have to earn that. But I think that starting out in the right place is very, very helpful.
Another thing that it does is as we build a portfolio of B2B SaaS companies, there is a community that is starting to form around that as well. That's something 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're 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.
Gopi Rangan: [00:09:36] Can you give an example of a company that you've recently invested and walk through the story of how you met the entrepreneur? How did you start building a relationship with them?
Pat Matthews: [00:09:46] 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 termsheet on right now.
Gopi Rangan: [00:10:03] Okay. We are getting some insider stories here.
Pat Matthews: [00:10:05] Yeah, absolutely. Let's go through it. So the company, one of the companies that we most recently announced is a company called YAC. Y A C. You can go to Yac.com. Yac is an audio messaging platform for teams. It is a really great product, really exciting company. We invested in them and Q3-Q4 time frame 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 source them on Twitter. In fact, Chris, from my team originally found them, connected with them. We had several phone conversations, zooms, we yapped back, back and forth or, 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, just love the, the team's vision, but also the 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 product can be, or excuse me, sometimes that progress can be mixed across product revenue or other variables. Sometimes you'll see great products, not a ton of revenue yet. Sometimes you'll see a lot of revenue, the product's got some catching up to do. In this case, the team really developed an amazing, amazing product.
Gopi Rangan: [00:11:28] Why were they able to do that? Like what, what do you think worked well for them?
Pat Matthews: [00:11:34] Well, I think a few things. Number one, they are a team of, 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 a remote distributed team as well. I think a lot of the vision for YAC came from both our design backgrounds, as well as their, building remote teams. They threw all of their design work overtime. They've got a big network of people that they've been working with on the engineering side as well.
They had raised a little bit of capital. I mean, they had gone through, a small accelerator. And, ultimately, we were able to build up 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 round.
Gopi Rangan: [00:12:32] It looks like the team lead with their strength and their strength was in design and that really shows in their success.
Pat Matthews: [00:12:39] Yes, very much so.
Gopi Rangan: [00:12:41] So you mentioned there are three examples you were going to talk about. YAC was one of them.
Pat Matthews: [00:12:45] Yeah, I think Yac is a good recent example. And, you know, today I think Yac is more important than ever. I mean, they had sort of been very visionary around what the 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. A lot of progress, not a lot of capital, beautiful software, great founding team, big vision, huge market, and I am very excited about them.
Another company, the second company I was going to mention is a company called Living Security, which is based in Austin. I met Living Security and, 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 coworking 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 and in Austin.
Ashley and I had connected, I'm pretty sure she reached out to me to sort of get advice. She was still actually still having a job at the time. She and her husband, Drew, were still, full time employed at their respective companies. She pitched me on the idea and, you know, I like that. 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 seed.
Gopi Rangan: [00:14:21] So 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.
Pat Matthews: [00:14:32] That's exactly right. We did just that, you know. She did a great job of, you know, 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, andfollowed up consistently. Ultimately, she 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. 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 the relationship and kind of be there when they go out to raise their 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, you know, we started talking monthly and, whenever things came up and we built a great relationship and I was super impressed with their progress.
Ultimately, we led their million and half dollar seed round. They continue to grow and do well and perform. In fact they closed their series A in the middle of this pandemic. That's another great example of a company we invested in. It's a little bit further along now.
Gopi Rangan: [00:15:54] This is great. You've 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?
Pat Matthews: [00:16:07] I mean, I think at first, I just really try 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 don't, a lot of it is just around the vision and the product itself. Ultimately over time, get to know them a little bit better.
Gopi Rangan: [00:16:26] 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?
Pat Matthews: [00:16:40] Yeah. I'll talk to that. And then I'll give you the third example cause they kind of play well together. So, you know, one of the biggest things that I think entrepreneurs need to get better at 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 in VC's that align, whose thesis, aligns with what it is the entrepreneur is building.
And so, you know, I think that oftentimes entrepreneurs see VCs and sort of one big category of - thing - if you will. Whereas, you know, I'm very focused on B2B SaaS. You are very focused on insurance tech and 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. 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.
And, I do think that entrepreneurs are taught that, you know, it's really a numbers game and you just have to fire out as many emails as you can and ask for as many introductions as you can. To some degree, I think that's right. But I think the more that you can map to the thesis the better.
And so again, one perfect example here on, June 2nd, 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 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 is he'd gone out and he was searching for a lead investor and he went to pitch folks and Crunchbase and all and 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 recurring revenue and a beautiful product.
He did a great job of outlining all that in the email. Of course that's exactly the type of entrepreneur that I want to talk to. So we immediately connected, and, on zoom, I think we did a zoom at first. And you know what? I really liked 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 multimillion-dollar company, but they've got the makings of a great company and that's exactly who 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, to talk to B2B SaaS entrepreneurs who are building great things.
Gopi Rangan: [00:19:35] 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. But here you are, you take a completely different approach where I love cold emails.
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 ended up making an investment. That's very refreshing to see.
Pat Matthews: [00:20:10] Yeah, I bet you half of our investments. I mean, one day I needed to crunch the numbers on this, but I bet you, half of our investments have been from cold outreach as inn entrepreneurs, cold emailing us.
I don't mind cold outreach at all. I mean, if, if I were an entrepreneur, I'd spend more time doing it, you know, warm, warm referrals are great. I mean, if you are just trying to search your way through LinkedIn to get, you know, a mild connection to me, I'd actually rather you just reach out directly.
Yeah, in fact, we have a sort of a mantra, I want to call it a policy. I don't know if it's, you know, if you'd call it that, but we respond to everybody. And so, you know, I'm not one of these people with a thousand emails in my unread emails in my inbox, you know, I respond to every email. I am at 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 an inbox zero, which also means that they respond to everything, not just clear out their inbox. So that's how I do business.
Gopi Rangan: [00:21:14] Yeah. I strive to be an 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.com boom. And then bust, you sail through, went really well with the Rackspace, then you smoothly transition to the venture side. Is there anything that's difficult for you?
Pat Matthews: [00:21:55] Our story and my story, I think, is anything but easy. With our startup, for example, I mean, number one, our .com failed.
When our.com failed, we spent two years pivoting from a failed .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,
Gopi Rangan: [00:22:24] You were in your twenties, right?
Pat Matthews: [00:22:26] Oh, yeah. I was definitely still in my twenties and early twenties. And you know, not only that, but I had to step away from the office most days to work part time jobs just to make ends meet. And in fact, one of my part time jobs for an entire summer, I sold books door to door and the heart of Southwest Virginia.
And that's Southwest Virginia, not West Virginia. Just to be able to service my credit card debt. And so, you know, we actually had quite, yeah, the struggle in getting our business off the ground. I can't imagine many other entrepreneurs going through what we did and the sort of years that we spent really turning our business into a new success story. I'm really proud of that.
You know, I think in many ways we probably should have just shut down and regrouped and, but we didn't, you know, 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.
Gopi Rangan: [00:23:28] Yeah, I've seen that, never give up attitude in you many times, and it shows with Active capital as well and 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?
Pat Matthews: [00:23:53] Yeah. I mean, one, one good example of 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 wrote 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 fled 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. Actually he has become really good friends with my son as well.
And so I would say that is one organization that I've had a lot of passion for over the years.
Gopi Rangan: [00:24:55] Oh, this is great to hear. We covered a lot of territory all the way from your early part of your career to now how you're running Active Capital. This is fantastic. It's always great catching up with you, Pat.
Pat Matthews: [00:25:08] Absolutely. Well, thank you. Gopi. Call me for anything. Okay?
Gopi Rangan: [00:25:11] Certainly. All right.
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