Wrangling Venture Entropy with Standard Metrics
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Wrangling Venture Entropy with Standard Metrics
Quaestor Rebrands to Standard Metrics and Raises a $23.7M Series A
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Happy Thursday!
One of the most frequent topics in Not Boring is the extraordinary growth of venture capital. More dollars invested, more funds, smaller funds, bigger funds, decentralized funds, global funds. The space fascinates me endlessly.
All of that growth in every direction means that the venture landscape has gotten a lot more complex. There’s an opportunity for new companies to help make sense of it all.
That’s where Standard Metrics comes in.
Today’s post is a Sponsored Deep Dive on a company that I invested in through Not Boring Capital. As always, I only write Sponsored Deep Dives on companies I would invest in, and in most cases, I actually have. You can read my thought process on deep dives here. I’ll always disclose my conflicts. No conflict, no interest.
Let’s get to it.
Wrangling Venture Entropy with Standard Metrics
(You can click this 👆 to go read the full thing online)
Every few years, there’s a new *thing* that’s going to change the face of venture capital investing as we know it. AngelList, ICOs, crossover funds, solo capitalists, crowdfunding, CartaX, Capital-as-a-Service. Most of them boil down to a few questions; how can we:
Increase liquidity in the private markets?
Improve capital allocation and pricing?
Expand access to the asset class?
Make sure the right things get funded as efficiently as possible?
Which all boil down to one question, really: how can we get the private markets to behave more like the public markets?
In terms of size and activity, the private markets, and venture capital in particular, have been growing at a torrid pace.
In 2021, venture capitalists invested $329.6 billion into startups across 15,500 deals… in the US alone. Those numbers are so large as to be practically meaningless, so a visual comparison to previous years might be helpful.
The $329.6 billion invested in 2021 was just a hair short of doubling the all-time record… set in 2020. The two most active years before that were 2019 and 2018. There hasn’t not been a new record set since 2016.
While the market has tightened a little in the growth stage, following public markets and the specter of rising interest rates, the pace in the market as a whole doesn’t seem to be slowing down. Big funds are raising bigger funds and there are more small funds, solo capitalists, and syndicate leads investing more money than ever. As one proxy for the latter, AngelList, which hosts smaller, newer funds like Not Boring Capital, now supports over $10 billion in assets, 10x higher than it supported in 2019.
Venture capital has come a long way since there were a handful of firms on Sand Hill Road investing into a handful of companies each year. Now, venture firms are everywhere and come in so many flavors Baskin-Robbins would blush. And each venture firm backs somewhere between a dozen and a couple hundred startups, from all around the world, in all stages of maturity and industries and levels of operational sophistication and, and, and. You get the point.
The startup ecosystem has jumped from a lower state of entropy to a higher one.
There’s no going back. Since the start of COVID, with more money flooding the market and more deals happening more quickly over Zoom, the venture market has jumped to a higher state of complexity. Very valuable companies like AngelList, DocuSign, and Carta (recently valued at $7.4 billion) help to wrangle some of that entropy with software. But there’s still a big infrastructural puzzle piece missing.
The private markets need standard metrics.
So, the private markets need Standard Metrics.
Standard Metrics’ goal is to build a data and relationship graph for the private capital markets.
That’s a deceptively tricky goal to achieve. Others have tried and failed to build a “Bloomberg for the Private Markets,” one resource to provide the same level of information and transparency to the private markets that public market investors have access to.
But Standard Metrics is starting with a more bite-sized ambition: get VCs to use its product to track the handful of metrics that matter most for their portfolio companies, like Cash in Bank, Revenue, Monthly Burn, and Gross Margin.
Win the VCs, the logic goes, and you can win their portfolio companies and their LPs, all of whom come with their own set of VC relationships, each of which come with fresh portfolio companies and LPs. When the spark catches, it can spread like wildfire.
VC to Portfolio Company. Portfolio Company to VC. VC to LP. LP to many VCs. Many VCs to Many LPs and Portfolio Companies. Slowly at first, and then suddenly, you become the standard.
To help set the standard, today, Standard Metrics is announcing a rebrand from Quaestor to Standard Metrics and a fresh $23.7 million Series A led by 8VC, which incubated the company in 2020, with participation from Spark Capital, Slack Fund, Fin VC, Alpha Edison, Kindergarten Ventures, First Trust Capital Partners, January Capital, and Not Boring Capital, among other funds. Individual investors include a16z’s Sriram Krishnan, Bain Capital Ventures’ Merritt Hummer, Quiet Capital’s Morgan Livermore, Meritech’s Craig Sherman, and Redpoint’s Medha Agarwal. (Actually, it was $3.7 million in notes and a $20 million Series A. Precision around metrics is important!)
When you build for VCs, your customers can also become your investors, and your investors can become your customers. That’s true here.
The hard part is: to set the standard for an industry, you need to win over most of the industry participants. Standard Metrics will need to displace incumbents and stand out among newer companies that look like competition on the surface. Getting that right requires the right timing, the right team, and the right strategic bets. So today, we’ll cover:
Entropy Wrangling
The Quaestor Quest
Standardizing Metrics
VCs as the Target Customer
Building the Private Markets Platform
The timing couldn’t be better. Venture is in need of an Entropy Wrangler.
Entropy Wrangling
In July 2020, the same month that Quaestor announced itself to the world, I wrote one of my thinkpieciest thinkpieces: Entropy Theory.
Look, I was new to writing newsletters and Ben Thompson was a big inspiration and I wanted to name my own theory, too. It was a little presumptuous. But I actually think the idea holds up.
The main point of the essay was to add direction to the Jim Barksdale quote: “There are only two ways I know of to make money: bundling and unbundling.” That always felt Sisyphean to me. “We’re not just bundling and unbundling,” I wrote, “but unleashing energy, organizing it, and then unleashing new energy on the next thing.”
An industry is in status quo. Some force or forces come along and shake things up, unleashing new energy and creating constructive chaos. Some company comes along and creates order from the chaos, at a higher, more advanced state. I called that company an Entropy Wrangler. The Entropy Wranglers capture a lot of value, and they themselves create a platform for more entropy, and then new players come along and wrangle that entropy.
Think about the music industry.
Napster and other file sharing services wrought chaos on the market; Spotify worked with all of the parties involved to bring order to the chaos. Today, it’s worth $29 billion. Spotify made it easier for more people to publish music — higher entropy — but it’s hard for most of them to make a living. That creates an opening for a new Wrangler, maybe a Music NFT platform like sound.xyz. z
It doesn’t have to be that dramatic. An Entropy Wrangler doesn’t have to save an industry from decline. Google, for example, took advantage of the good chaos created by the internet’s rapid growth by building a tool that made sense of it all. It set the standard, and leagues of SEO specialists fight to follow it. In the process, it indexed itself to the growth of the internet. That’s been kind to Google shareholders.
That’s the kind of Entropy Wrangler Standard Metrics is building, bringing order to the chaos and opportunity brought on by the growth of venture and web3 investing over the past couple of years. In the process, it hopes to become an indexed bet on the growth of private market investing.
The Quaestor Quest
So the timing is perfect. How about the team?
They’re intimately familiar with the problem.
Before there was Standard Metrics, there was Quaestor. And before Quaestor, there were spreadsheets. Lots and lots of spreadsheets.
Very often, venture capitalists fund people who are trying to solve a pain point in their personal or professional lives. Occasionally, VCs spin up their own companies – called incubation – by identifying a hole in the market with no solution and bringing in someone to lead a company to fill it. It’s very rare to find stories about the overlap in that Venn Diagram: VCs incubating companies to solve their own pain points.
That’s how Standard Metrics began its life as Quaestor, inside the walls of 8VC. The venture capital firm’s partners realized that the companies in their portfolio, some of the most technically sophisticated in the world including Anduril, Asana, The Boring Company, Cityblock, Flexport, Oculus, Palantir, and Wish, were still updating them via spreadsheets (at best) and PDFs (yuck), and that there might be an opportunity to fix that with software.
According to the company’s announcement post in July 2020, “Quaestor was born from a simple question: why is it so difficult for startups and investors to collaborate around financial data and business metrics?”
I’ve had this experience first-hand from both sides of the table, and it’s a surprisingly real problem for something seemingly so simple.
At Breather, we tried a bunch of things to keep our board members up to date on metrics, from the standard monthly investor update and quarterly board deck – which I’m sure some junior person on their team had to put into a spreadsheet – to operating models to an investor dashboard in Looker. Inevitably, that Looker got bloated with different requests for specific data points or some investor’s favorite metric based on their experience with another quasi-analogous company. It was also as certain as death and taxes that an investor would see a number, take it out of context, and blow up its importance, wasting hours of the exec team and data team’s time.
As an investor – albeit a non-lead one usually without data rights – I’m at the mercy of whatever founders decide to put in that month or quarter’s update. Key metrics change often, companies report things differently, and all of that information is squirreled away somewhere in my inbox until I take the time to manually move it from email to Airtable. It makes staying on top of portfolio companies’ performance a bigger challenge than it needs to be.
On the individual level, it’s a pain. At the system level, it’s a huge drain of time and resources:
Companies spend too much time pulling together numbers for investors.
Investors spend too much time manually tracking and cleaning data, if they do it at all.
Surprises lead to tension between companies and their investors, which means that the relationships aren’t as productive as they could be.
Investors don’t allocate money as effectively as they could to the most productive companies.
The most productive companies need to waste too much time fundraising when they could just focus on building their businesses.
If the solutions to some of the biggest challenges facing humanity lie in the technological innovation of talented entrepreneurs, then wasting their time going back and forth on metrics should be a crime. Conversely, tools that save entrepreneurs time and let them focus on the things they’re uniquely good at should generate a ton of leverage.
So the team at 8VC, including partners Joe Lonsdale and Alex Moore, put together a co-founding team to go build it, with a mix of operator and investor DNA:
Kevin Hsu was doing an EIR stint at 8VC after being an early PM at Carta, bringing deeply relevant experience to the problem.
Deny Khoung worked as a designer at 8VC, helping spin up incubated companies like Affinity.
John Melas-Kyriazi joined as CEO after five years as a VC at Spark Capital.
The trio, which had a mix of operator and investor DNA with a sprinkle of experience building best-in-class tools for the space, spun out of 8VC in March 2020 as Quaestor, named after the treasurers of Ancient Rome.
(They’re not the only ones who liked the name for a money-related business – I uncovered Quaestor.com’s first inhabitant from the Internet Archive’s Wayback Machine.)
In July 2020, Questor announced a $5.8 million seed round from 8VC, Spark, Abstract Ventures, Riot Ventures, Fathom Ventures, and GFC. In the TechCrunch piece announcing the raise, Melas-Kyriazi explained the types of questions Quaestor would help answer:
How do VCs and their companies interact around financial data, whether it’s documents like P&L / balance sheet / cash flow statement [or] individual financial KPIs like revenue, gross margin, net income, ARR, etc.? How do companies share that information with their investors to keep them updated? How do investors support their companies in understanding what goals they should be setting?
As TechCrunch highlighted, Quaestor was opinionated from the beginning, with two goals:
Turn the spreadsheet into a SaaS product. Like many SaaS businesses, goal number one was just to unbundle Excel with specialized software.
Define the Metrics that matter. Quaestor’s customers all work from the same set of key metrics like cash balance, revenue, gross margin, and burn.
Why guide customers to use the financial metrics? As Melas-Kryiazi explained at the time, “Most entrepreneurs come from a product background or engineering or sales and they might not necessarily have worked in finance before.” A set of … standard metrics … would make it easy for entrepreneurs to understand which metrics matter.
That’s a good, simple answer for the press, but there’s more there than that. The decision to pick standard metrics from the start is one of two subtle strategic decisions the company made that will ultimately determine whether it’s successful in building the data and relationship graph for the private markets:
Setting Standard Metrics
Focusing on VCs as the Target Customer
There are strong companies in the market including incumbents like IHS Markit, and new entrants – Cabal and Visible.vc – that look like direct competitors on the surface.
But Standard Metrics is betting that those two strategic choices will differentiate it and help win the market.
Standardizing Metrics
With this Series A announcement, Quaestor is officially changing its name to Standard Metrics.
Aside from being much easier to spell, John told me that the new name better reflects the company’s mission: “In this next growth phase, we are building true standards for how critical information is shared in the private markets for the first time using software.”
Building a standard set of metrics was Standard Metrics’ first strategic choice.
Picking a certain set of metrics that every investor starts with, instead of letting investors or companies choose their own starting set, is a strategic decision, not in the vague sense, but in the sense that it comes with trade-offs that the team believes are worth it. Every company using Standard Metrics starts with these eight metrics:
Cash in Bank
Net Burn
Runway
Revenue
Gross Margin
Operating Expenses
Net Income
Headcount
Investors can and do choose to add other metrics to request from their companies – they may be vertical-specific metrics, metrics the investor has found to be particularly predictive, or even things like ESG metrics that matter to the investor – but it all starts with those eight. I asked John why they chose those eight when each vertical has its own metrics, and he explained:
There are metrics that apply to every company, and then there are metrics that are useful for evaluating specific subsectors (e.g. SaaS, consumer apps, marketplaces, etc.). We are building out sector-specific standards as well as global standards, but starting with global ones.
The approach is subtly different than Visible.vc’s. While both companies let investors customize metrics, Standard Metrics always includes the same eight metrics, whereas Visible.vc lets investors start from scratch for each segment or even portfolio company.
On the surface, Visible.vc’s approach might appear to make more sense. Of course customers should get to choose for themselves, and of course different types of companies should have different sets of metrics.
And if you’re building a purely SaaS product, it probably is. But Standard Metrics has a bigger vision: it’s trying to build a data and relationship graph on top of which it and others can build a series of apps. Today, the data that investors get from companies is all over the place, negotiated on a case-by-case basis, and practically impossible to compare consistently. So to start, Standard Metrics needs to wrangle that entropy and build a standardized set of metrics.
In other words, just as equity is the atomic unit on top of which Carta built a series of products, operational metrics are the atomic unit on top of which Standard Metrics will build a series of products.
Standard Metrics wants to build the core system of record for operational metrics, the main source of truth investors rely on to run their businesses and make decisions. “Standards allow everyone to move faster,” John explained, “and we think there are enormous advantages to standardization of data through software. For example:
We can make it lightning fast and automated for companies to pull their metrics of interest into our platform if those metrics are standardized and accessible through various APIs. Also, we will be able to offer context to companies over time on their performance — for example, how do you stack up against other SaaS companies in your lead investor's portfolio in terms of ARR growth or NDR?
But picking metrics is one thing, collecting them is another. Standard Metrics offers integrations with banks and accounting software to make collecting the metrics seamless.
That’s useful, and it’s an improvement over incumbents like IHS Markit, but for modern software, integrations are table stakes. There are startup-focused accounting tools that do the same.
The question is: how do you actually get enough companies to give you that data that you become the standard?
That brings us to Standard Metrics’ second strategic choice.
VCs as the Target Customer
Every month, or every quarter if they’re lucky, venture-backed companies need to send updates to their VCs. It’s time consuming, unstructured, and largely ineffective. These casual updates might have worked better in a world in which each company had fewer investors and each investor had fewer portfolio companies, but today, it’s obvious that software is needed to keep everything organized.
So obvious, in fact, that it’s become a competitive space: Standard Metrics, Cabal, and Visible.vc are all used by companies to send investor updates, make and track asks, and improve investor relations. A crucial difference among the three, though, is who they choose to serve as their primary customer.
Cabal is the most company-first of the three.
The language on its homepage clearly speaks to founders. The product exists to help founders get more out of their large and growing cap tables. That starts with better investor updates, but branches out in a different way than Standard Metrics, towards a suite of tools designed to help companies “build a modern advisor network.”
I love Cabal’s ethos and product and think they’re going to build a very big company, I just think that it will end up looking a lot different than Standard Metrics’ does over the next few years.
Visible.vc is a little bit closer to Standard Metrics on the surface. The language on the homepage is a little more ambiguous, focusing on the relationship between investors and companies.
Below the fold, though, the language speaks more directly to companies, and the customer list features companies not investors. The pricing page confirms it: companies are paying for the product, although investors can too by contacting sales.
Visible is company-first, investor-second. Cabal is company-only, a tool they can use in the battle to get more from their investors.
Serving companies first and foremost obviously makes the most sense. Companies are the ones who need to send the investor updates in the first place; they should be the target customer, right?
Not so fast…
Standard Metrics’ second strategic choice was targeting investors as its customers.
The difference is there right on the homepage, but subtly. It speaks to helping both investors and founders. The difference becomes more clear when we dig in.
First, the customers it lists are investors – including venture investors like NFX, 8VC, and March Capital, institutional investors like Munich RE, and crypto funds like Pantera.
Second, it puts its “For Investors” features and value propositions before its “For Companies” ones. Third, and most importantly, investors are the ones paying for the software. Companies get Standard Metrics for free.
Choosing to target investors over companies seems like a minor thing, a matter of sequencing, but it’s a crucially important differentiator and the fastest way to set and collect the industry-standard metrics. There are a few reasons:
First, lead investors typically have the contractual right to receive data from the companies in which they invest and can request to receive the data points that they want, within reason (and often, as was my experience, outside of it).
Second, investors have the greatest need for standardized metrics. Companies should only be looking at the metrics that will help them make better decisions about their business, even if they’re totally different than the metrics that other businesses look at. Having standard metrics across portfolio companies as a starting point helps investors make better decisions about where to focus attention, whether to try to preempt a round, and how much to invest in follow-ons. Standardized metrics also help them report up to their investors: LPs. While companies might be the right customer for investor update software, investors are the right customers for standardized metrics.
Standard Metrics gives VCs one place to keep track of company updates, asks, and of course, metrics, across their entire portfolio:
The third reason is the most important: VCs are the best node in the web of private market investing relationships from which to grow rapidly.
In $1 Trillion in Equity: How Carta is set to unlock private markets, a brilliant essay that I’ve quoted before, Tribe Capital wrote about why it believed Carta was going to be such a special company. The concept of Carta using equity as the atomic unit I cited above comes from that piece. You should read it.
In the piece, Tribe demonstrated how Carta was able to grow to “completely dominate the capture of this atomic unit.” Carta wanted to build the system of record for equity, which required finding product-market fit with its first product, cap table management, then layering on its 409a product, both of which created touchpoints for investors and companies. Then, “The next step was in recognizing and amplifying a network effect that was emerging between companies and investors,” which Tribe illustrated in this diagram:
Carta started by selling to companies, but investors got so much value out of the product that they started writing clauses into term sheets requiring companies to use Carta, and then built a fund admin product for investors to better serve them and attract more investors, who would bring in more companies, and so on.
For Carta, the three main stakeholders were employees, companies, and investors, so they started in the middle, with companies.
For Standard Metrics, the three main stakeholders are companies, investors, and LPs, so they’re starting in the middle with investors. You can recreate the diagram that Tribe made on Carta for Standard Metrics, and it fits like a glove:
The biggest difference so far is that Standard Metrics doesn’t have a product for LPs, although those are on the roadmap. The web of relationships creates a ton of growth paths for Standard Metrics:
One investor asks its portfolio companies to keep their numbers up to date in Standard Metrics.
Those companies use the product for free to send updates, including metrics, to their other investors.
Those investors both ask their portfolio companies to use Standard Metrics and send their LP updates, with clean, up-to-date numbers on portfolio companies, to their LPs.
LPs ask their other fund managers to send them updates with Standard Metrics.
The whole thing kicks back off, and it spreads until Standard Metrics becomes the standard.
As a kicker, Standard Metrics hopes better tools encourage data transparency with employees, too. If companies share the information they’re sharing with their investors with their employees, too, those employees might demand that level of transparency from their next employers. The standard gets locked in more deeply, from all sides.
Of course, just because it diagrams out doesn’t mean it’s easy. Standard Metrics faces competition on all sides, including from Carta itself. Even if it’s not actually directly competitive with Cabal and Visible.vc, getting companies to use multiple tools for similar reasons would be challenging.
To set the standard, it needs to win a big piece of the market, quickly.
$23.7 Million to Build the Private Markets Platform
I first spoke to John and Kevin about a potential deep dive in December 2020, a few months after they’d raised their Seed round.
Back then, it was more hypothetical. They had their six investors onboard as design partners, but weren’t yet focused on growth. They were focused on highlighting all of the friction between boards and exec teams thanks to sporadic communication, a pain that I knew well. And they knew that they wanted their atomic units to be metrics and communications, or as they put it today, the data and relationships graph.
But at the time, we decided that it would be better to hold off until they were fully live, and until they’d picked up enough momentum to make it really interesting. That’s now.
Between December 2020 and now, the company has been busy:
Raised $3.7 million in notes from strategic investors who missed out on the Seed Round, with an emphasis on investors who were already customers.
Expanded from traditional venture capital to crypto with clients like Pantera and Polychain, and already have live token tracking in the product.
Grew really fast, hitting $1 million in booked revenue in less than a year, which was enough to convince the team that it was time to raise the Series A.
Rebranded from Quaestor to Standard Metrics.
In January, they officially closed a $20 million Series A led by 8VC and a community of customers (and prospective ones) including Fin VC, Alpha Edison, and January Capital. The fun part about having VCs as your customers is that they can be your investors, too.
Alpha Edison’s Robey Miller said, “We started working with Standard Metrics at the beginning of 2021, and their software has become a crucial piece of financial infrastructure for our firm where we collect, centralize, and access all of our portfolio data. With this Series A investment, we are now proud to be both a customer and an investor.”
January’s Jonathan Hodson added, “Standard Metrics has transformed the way we do portfolio reporting and performance monitoring here at January Capital. It has become our go-to portfolio management tool and system of record for our investment data.”
All told, Standard Metrics has dozens of paying VC customers around the world (I can confirm this based on the Standard Metrics updates I get through Standard Metrics as an investor) and thousands of companies using the product for free, but it’s still early. Building a standard takes years.
It will need to convince hundreds, and then thousands, of venture and crypto funds to pay for the product and convince their portfolio companies to use it. It will need to build products for LPs, too, to improve GP<>LP communications and recreate Carta’s magical network effects. It might expand from venture deeper into crypto and even into the larger private equity market.
And if it pulls all of that off, it has the right to hit stage three of its plan: to become the data and relationship graph and platform on top of which anyone building apps for private markets builds.
We’re still a long way away from the private markets behaving more like the public markets, and in many ways, full parity isn’t even desirable. Early stage companies should be able to build in relative obscurity while they figure things out. And as Gavin Baker points out in this Invest Like the Best episode, no private market investor wants their investments marked to market daily, let alone second-by-second.
But the strict demarcation between private and public is becoming antiquated. Great companies are going public later in their life, others are going public via SPAC long before they should, and many of the same investors are playing late stage venture, crypto, and public equities, and comparing opportunities in each against each other.
In a world in which Standard Metrics is ubiquitous, investors will more effectively allocate capital to the most important companies whether they’re public or private. Regulators may relax restrictions like accredited investor laws if they feel comfortable that investors have access to good data and benchmarking. There will be broader market participation, more people sharing in the upside of ownership, and more liquidity for startup employees. Innovation will happen more efficiently.
And if Standard Metrics really gets its way, companies will share information more transparently not just with their investors, but with their employees. To the company’s co-founders, transparency should apply to all stakeholders.
Ultimately, if Standard Metrics succeeds, it’s the World If meme for private markets:
Standard Metrics has the timing and team to pull it off. And now, it has $23.7 million more in the bank with which to pursue its strategic bets and set the standard for its industry.
Thanks to Dan for editing the piece, and to John and the Standard Metrics team for working with me to tell their story.
Thanks for reading and see you on Monday,
Packy
Wrangling Venture Entropy with Standard Metrics
great! Good luck. I hope there's also a metric for "capital adjusted growth rate" the industry responsible for allocating capital must believe it's causal. It's rare (seems nonexistent) that the businesses allocating capital don't look at the leverage on growth. Yes, I know, it's about the leverage on future growth. But all of the rest of these metrics are trailing. Thanks