Doing Venture Capital In The Age Of Product-First Companies

Guest post by SC Moatti (Kauffman Fellows Class 25), Managing Partner, Mighty Capital

Let me begin this post by thanking the Kauffman Fellows for honoring our firm in the inaugural Kauffman Fund Returners Index, which tracks global unicorn activity since 2016 by country and industry sectors. As a women-owned venture capital firm, Mighty Capital, this recognition of the good we hope to do is exciting, humbling, and energizing in the best possible way.

Our investment strategy is succeeding better than we could have hoped. Yet most of us would agree that these are unusual times. Normally, businesses and investors pay attention to a few key statistics and on paper, many of those things are good: inflation under control, unemployment low, and corporate earnings good. Yet deals still get done slowly, M&A activity is underwhelming, and the IPO window remains closed. For the most part, companies are slow to commit to big new projects, salespeople fight hard for every new contract, and people report a continuing uncertainty. In short, no one seems to feel the rush.

What’s going on? I believe the lack of conviction by many is because the old business world is changing. It was underway before 2020, but it’s accelerating rapidly in the post-COVID world.  

I was lucky to figure it out early. I worked in mobile at Facebook, now called Meta, during the years that Mark Zuckerberg was building his mobile-first strategy. I saw how consumer behavior was accelerating, in terms of time to information, time of consideration, and time to buy. I saw the growing influence of social media on consumers. And I saw how this was starting to affect the way digital products were built.

In response, I founded Products That Count, a global network of product managers and chief product officers. Today it has more than 500,000 members. These people are passionate about product design, product improvement, tight feedback loops through digital technologies and information sharing. They actively seek out new technologies and strategies and fiercely network about the latest discoveries. As a group, they are also more diverse (and successful!) than their predecessors.

With COVID, their work became essential. The Work from Home revolution was also a massive increase in online connectivity, in particular commerce. Tracking goods online and watching deliveries became something of a pastime. Thanks in part to the smartphone revolution, there had been an increasing supply of inexpensive wireless chips that could be used in physical goods. Now these have become a standard feature. Product people saw and steered much of this, since more information was flowing through the new digitally energized products. It is the biggest single-lasting effect from COVID that no one is talking about.

I knew I was onto something important, but I was also amazed by how vital PMs and CPOs have become within the corporate structure.They have increasingly large P&L responsibilities, since their work now feeds not only into product portfolios and product creation, but sales, research, and future planning. They are moving forward, while traditional marketing struggles to figure out how the world has changed.

No wonder that the number of Fortune 1000 companies with CPOs has increased 10x in three years, to 40% of companies. By 2027, we believe, 70% of companies will have them. And with good reason; companies with CPOs are outperforming their peers. More recently, we’re seeing CPOs promoted to the most senior ranks of a company at a rate far greater than their peers.

You can see how this trend has elements of an investment thesis. But there’s more to it than that. At Mighty Capital, we aren’t just looking to invest in the products and services they need, we serve the PM community in Products That Count, and in turn are able to gain an early lead on the new trends and companies they’re most excited about. After careful diligence we find the companies where we can be the most helpful investors, and our PM community becomes our champions.

Our investment strategy is succeeding better than we could have hoped. Done right, it’s a new kind of healthy symbiotic relationship between an emerging power in the corporate world, and their investor champions. Our first fund, a 2018 vintage, saw over 10% of its investments realize 10x, with a 36% realized IRR. Not bad for a first voyage out. Our second fund, launched in 2021, has avoided many of the pitfalls felt in that high-valuation period, and currently has a 23% IRR, and growing.

We’re now raising our third and most ambitious fund, though we think we’re being relatively conservative compared with the opportunity. We’re good with that, since Mighty Capital is committed to the long haul, and maximizing the benefit from doing right by this important long-term trend.