CVC Is Not Your Exit Strategy or GTM Plan

0:00Not many companies are going public in the last few years. Right. So and that doesn't seem to be easing up any either. I keep thinking it will. But, you know, even if it does, you still have to have hundreds of millions of dollars in revenue and be able to string together six quarters. Right. So that you know that when you go public, you can hold it together. It's just not easy. Right. It's you know, you want to have more than one exit strategy. in my opinion. Every founder should have more than one exit strategy. And yeah, everybody should say, I'd like to go public. That's great. But okay, if you're not going to go public, who is going to buy you?

0:40Tamara Steffens: Tamara Steffens is Managing Director of Thomson Reuters Ventures, where she invests in early-stage companies building around legal, tax, accounting, and enterprise workflow. In this conversation, we get into what needs to be true before a startup is ready for corporate venture capital, what happens after Thompson Reuters Ventures joins your cap table, and why she says every founder should be thinking earlier about exit paths. I'm Walter Thompson. This is Fund, Build, Scale. Are you building something that's hard to explain? It can be a sign you're working on something interesting, but it also raises the risk that you're missing out on fundraising, sales, hiring, and media opportunities.

1:20Tamara Steffens: I help early stage founders sharpen the narrative. What matters? Why now? Who needs to care? And why they're the right team to make it happen. If you're preparing for a raise, a product launch, an important customer meeting, a panel discussion, or even a hiring push, I can help you pressure test your story before the stakes get higher. Visit the Fund Build Scale website to learn more or email fundbuildscale at gmail.com. Tamara, thanks very much for joining me today. I really appreciate it. Yeah, I'm happy to be here, Walter. Thanks for having me. At a high level, what does Thomson Reuters Ventures actually do inside Thomson Reuters?

1:58Yeah, so, you know, we were set up in 2022 was our first year. So we've been around now a little over four years. And initially it was to bring signal back into the corporate product teams, engineering teams on what the latest tech was. kind of what I like to say in categories that we are in or adjacent to, just to improve our learnings and understanding of how to be competitive in market. Additionally, the other thought was, you know, if we invest, can we establish partnerships and go to market with some of these solutions for our customers, right? And our customers, primarily large corporates, law firms, tax and accounting firms.

2:53So that's what we, you know, the focus was initially, and it remains to be our main focus.

2:59Tamara Steffens: What kind of companies are you saying yes to right now? What are you looking for? Yeah. I mean, I couldn't have predicted this. You know, I guess the AI craze kind of happened at the end of 2022. But if you look at the categories that we've been very successful in and remain the leader in, particularly in tax and legal, those two verticals are just perfect for, you know, AI applications. And so we spend a lot of time in those categories and looking at, and the periphery and anything that touches it. And as you know, everything touches tax. Maybe not everything touches legal, but we're a pretty religious society.

3:45So unfortunately, a lot of that happens as well. So I think anything in those categories or adjacent to those categories are areas we're really interested in.

3:56Tamara Steffens: Talk to a couple of founders and ask them how familiar they were with CBC and if they thought about it. And the two I spoke to, they told me that what they heard or kind of believed about it was more like, oh, well, this is going to, you know, this is going to get me distribution and partnerships and customers. What needs to be true for a startup for that to happen? Well, I mean, the product, one, has to be shipping and they have to have some references, right? So yes, in some cases, you can, a corporate can bring them their first couple of customers. but generally speaking, a corporate company should be able to bring you customers after you have, you know, worked out the kinks, if you will, in the product so that it's really ready to ship and ready to demo.

4:47Usually in pre-seed or seed, it might not quite be ready for something like Thomson Reuters to take it into, you know, a hundred law firms, right? So we have to kind of pick and choose. We've done earlier stage investments. And in that case, our value add has been our engineering or our product teams getting involved and trying to steer them in the right direction and maybe bringing in one early customer to do some testing, right? So you can get a lot of value out of that. But I think the majority of the value is going to be from a partnership distribution and true revenue coming in from those customers.

5:25Got it.

5:26Tamara Steffens: I mean, this is legal tech. We're trying to mitigate risk here, but doing proof of concept or a pilot with an untested startup sounds risky. How do you score that circle with the people you're networking with, the people you're promoting as customers? Yeah. I would say the good news is legal and tax, if you're not using AI, you're already behind. And it really took off very quickly. I mean, at first, law firms were kind of like, Like, we'll wait and see what everybody else does. And that lasted, you know, literally a couple of months, not a couple of years in most cases. So, you know, there probably isn't a law firm that I've talked to in the last year that isn't implementing AI or doesn't already have it implemented.

6:10So we're not we're not having any problem or trouble with that. Um, sometimes depending on what they're bringing it in for, if it's a use case, like a vertical use case, so for, you know, plaintiff law or patent, um, those are relatively easy to bring in and test pretty quickly against a case or against an example. Um, so a law firm can, can do that. Some that require, you know, inputting all of your internal data and then refining the model, that's going to take a little bit longer. So I think it kind of depends on what type of application you're bringing in and for what purpose. If it has to relearn everything in your own firm, it's going to take a little bit longer to understand that workflow and that pace to be able to refine the model and then apply it to your workload.

7:01But if it's really use case based, vertical use case based, you should be able to apply it to a couple of cases right away to test it. Can you give me an example of a startup you worked with where, like, what were the traits or the what were the founder traits or behaviors that made that strategic relationship successful?

7:20Tamara Steffens: Like what specifically happened? Yeah, I mean, we've invested in almost 40 companies now. So we've talked to a lot of founders to get those investments done. I would say, you know, there's some truth to if a founder's done it before. Right. So repeat repeat founders are always, you know, pretty experienced. They know how to approach the market, raise funding. They understand what the steps are to get to the next level. So that that's always a plus. It's not we don't have all, you know, multiple, multiple success on our cap table. But that's one. I would say understanding the customer and the market they're going after.

8:06to really understand what is the addressable market they think they can go get. Because that is, I think, one of the bigger mistakes founders make in talking to investors is they come in with this giant TAM, you know, X billions of dollars. And really what their solution is, at least at the moment, it might be, you know, several hundred million of that pie that they're going after. So sometimes we'll peel it back for them and say, look, this solution actually is going to do this. And so, yes, in two years, three years, if you expand the product or you add this or you may be able to grab more market share because the product will do more.

8:54OK, that's fair. And that's what all founders should be thinking about is what the roadmap is. But what is it today and really what can you get? And then what percentage of that market, you know, of that TAM, can you really go get, you know? And if they're coming in saying, I'm going to go get 50%, no, you're not, right? If you get 10 or 20 % of a particular market, you're going to have a pretty good moat, right? That's fantastic. So give me a reasonable number on the TAM. Give me a reasonable where you're going to be a year from now, two years from now. Now, that's more impressive to me when a founder understands that they can actually win.

9:34Right. They're actually going to make those numbers that they're sharing with me in that deck. Right. Some of them are not right now. In some cases, the product is just so good and it is a unique idea that we still will want to invest and go down that path. So, you know, we've taken some bets even when I thought the numbers were wrong. they've given to me. And, you know, the numbers were wrong and that's okay. They're still doing pretty well. So I'm okay with that.

10:04Tamara Steffens: It depends on the founder, I'm guessing, and what they're offering. But if it's a number that looks like they just pulled it off of like ChatGPT or Claude or a Google search, like, is that really, is it a red flag for you? Or are you kind of like, you know. If it's way off, then I'm like, no. Usually it's like, okay, you know, we're going to have to agree to disagree that we don't think this is the TAM. I'm usually pretty, I am definitely very direct with founders and we let them know quickly if we're not going to move. Or if we think, you know what? Sorry, do you tell them why? Yes, I do. And often, sometimes it's just a click or two, too early for us.

10:41Like we can't help you, right? You don't want us on your cap table right now. But in a year when that product is shipping or even in six months when that product is shipping, come back to us. Because when you're ready, we can help you, right? So we're usually, we'll let them know. We don't do a lot of seed. We do primarily Series A. So at that point by Series A, you've got generally more than a million in revenue. You've got real customers, references that we can talk to so we know how to position you within our customer base.

11:13Tamara Steffens: How much of it is inbound versus outbound as far as the deals you're making? I would say for us, it's probably 50-50. we get a lot of inbound on tax and legal because of who we are. So a lot of founders, when they're starting a legal tech company or starting doing anything with corporate tax, income tax, they're coming to us. You know, we haven't announced one, but there's one, a tax deal we just did. And it's perfect because they're doing something we don't do, but yet they can use our tax engine, right? So perfect, right? Come to us, we look at the solution, it's amazing. They're really getting a lot of traction in the market.

11:58If we plug our tax engine into this solution, it makes them even better, right? And so we can offer that. So that's different in the case, we did an announcement recently with one of our investments on the legal side too called Supio, where they're using Westlaw now as part of their solution, right? So it's a plaintiff, a legal plaintiff solution or for plaintiff law. And they've incorporated Westlaw in, which is, you know, the legal database that every law firm uses, right? So it's a big advantage for them to be able to have Westlaw as part of their solution. And the same thing on the tax side.

12:42most companies aren't going to go create a tax engine. It's very complex, not to say that there aren't some trying, you know, I'm sure there will be competition, but there's only a couple of large tax engines out there that do, you know, broad-based income tax, if you will, or corporate tax in many cases. So if you can use our tax engine, but you have a better solution for that customer, we'd love to look at it, right? Let's see if we can find a way to go to market together.

13:13Tamara Steffens: Is there an archetype or like a certain cohort that founders that you're working with are coming from? Are they CPAs? Are they tax attorneys? Or if I were like, you know, a recent accounting grad and I had an idea for something based on something I saw at a summer job, could I come to you with a pitch? We do get a bit of that. Sometimes the early graduate or the, you know, accounting grad or legal grad right away, the product might be a click too early for us. Sometimes we did incubate one that turned out amazing. So we've done something not out of our realm to do. I would say it's really a big mix.

13:54In legal tech, you do have a lot of legal tech that they'll have lawyers in their product, right, as their product managers. And that's pretty helpful, right, because they understand legal workflow and, you know, case law and precedent, et cetera. So that's pretty helpful. It's not mandatory. We've seen really successful tax applications and, you know, ERP type, you know, latest, greatest that have no background in it at all. Right. But they understand AF, understand workflow, they understand the problem. And in some cases they're approaching the problem differently, which is fantastic. Right.

14:38So it's, it's a new approach to, to solving the problem. But I would say in most cases, legal tech and accounting tech, there's going to be, you know, accountants of legal people in the product line somewhere looking at it.

14:53Tamara Steffens: You write the check, the money hits the account, what should a founder, what are you looking for in that first 30, 60, 90 days to show that they actually want to create some value beyond just getting their hands on your money? Yeah, we will usually start the discussion about how to have a partnership and how to go to market with us before we even write a check. So we'll do a little bit of that work up front. The other thing that we try to do is even make customer introductions ahead of writing a check. So if they've got a solution and we can bring a couple of customers to the table to take a look at it, we'll absolutely do that.

15:34So we'll say, is there a law firm or is there an accounting firm that you're trying to get into that you'd like an introduction or that we can do a demo of your tech. So if I'm a founder, I'm asking for some of that ahead of time, or at least like, can we cross-reference the customers I want to go after to make sure they're your customers as well? That's always a good thing to do to see like, here's who we know is on our list of potential customers. And then in that first 90 days after you write the check, you should just be going for it, right? Like let's actually execute on this list, right?

16:15Here's the first three, here's the next three that we're going to go to market with. In some cases, it might be us being the customer as well. So there's an AI-based tax technology company out of Palo Alto called NeoTax that does research and development tax credits, right? Completely AI-based, amazing tech. And the way we did diligence originally was to bring them into our head of tax internally, right? We have a lot of software engineers, we're a software company or a tech company. So a lot of R and D. And so they looked at it and said, this is fantastic. We currently pay a consulting firm a lot of money.

16:59If we can use this software, we basically don't need them anymore. And our engineers will be so happy because this will all be automated. There won't be any more interviews or audits or anything like that, right? Because this automates the whole process. So yes, it took us about three, four months to bring it in-house and test it. And then a little bit longer than that to actually implement it. But then we became one of their largest corporate customers, right? And shortly at that, they won OpenAI, right? As a customer, right? You can't get much more than that on new development and somebody that's doing a lot of R &D.

17:37So sometimes we can also be a customer of the tech, but our customers can now buy that tech as well. So it's kind of a win-win.

17:46Tamara Steffens: Do you take a board seat after investing? We don't. And the fiduciary responsibility is just not worth it for us from a corporate perspective in my previous company, when I was also at CBC, we did. I don't think it's necessary. I don't think it adds any more to our investment to have a full board seat. We will take a board observer seat if the founder finds value in it. And I would say most of the time, 80 % of the time, they do want us to take a board observer seat. One, because we're bringing them customers or our engineering or product teams are working together again, like I said, either with our legal content or with tax, you know, depending on, um, our tax engine, depending on what we can do with them from an integration perspective.

18:40Um, we'll definitely take a board seat then or not a board seat, a board observer seat.

18:44Tamara Steffens: But they're actually, they're, they're liaising with like, you know, engineering teams and product teams inside Thompson writers after them. Yes. Not at all, not in every single investment, but in a lot of our investments. Yes. So, again, going back to those behaviors, those traits, what are the things founders do that makes your team want to help them internally? I think if they have both a pipeline that we can understand, that we can share, that then can be executed on by both sides so they know, we know what they want us to go do, we can do that. Right. That it makes sense to us if they understand how they're going to spend that money that they're bringing in right from from their raise.

19:31That's really important as well. So that's one of the things I look at at founders like, what are you doing with this money? And, you know, how many months does this buy you? Right. Assuming that these numbers are correct. I would say in all cases, we cut the numbers in half just because we're conservative. So we'll take their numbers and trim them way down and we'll say, OK, so assuming you only hit half of the number that you're targeting, then your runway is actually X, right? So you've got to really be able to plan for that, provided the founder knows what they're going to do with the money, how they're going to approach it, what they're going to do if the revenue doesn't come in as quickly as they hoped.

20:12That's important to understand. How are they going to adjust? And really, what is their target, right? What's their pipeline so that we can help them?

20:20Tamara Steffens: Don't raise if you don't have a plan for how to spend it. Correct. But the game right now is kind of crazy, right? People are raising enormous amounts of money at crazy valuations, especially in legal tech and taxes are behind. And they're doing it because the other startups are doing the same thing, right? So they're kind of in this race to make sure they have enough to do whatever it is they think they're going to need to do. It's not a great situation, right? They take a lot of dilution. And well, and in some cases, the valuations are very high. They're not taking as much dilution, but those are big shoes to step in, right?

21:06So you're really eliminating some of your exits that you could possibly have, right? Because now it's either really large corporations can buy you or you go public. There's no in between. So with these crazy valuations of billions of dollars, when you're only, you know, you're making maybe 50, 100 million, if that, how do you exit? You know, you get one way out, right? And it's not many companies are going public in the last few years, right? So, and that doesn't seem to be easing up any either. I keep thinking it will, but, you know, even if it does, you still have to have hundreds of millions of dollars in revenue and be able to string together six quarters, right so that you know that when you go public you can hold it together um it's it's just not easy right it's you know you want to have more than one exit strategy in my opinion every founder should have more than one exit strategy um and yeah everybody should say i'd like to go public that's great but okay if you're not going to go public what who is going to buy you in silicon

22:18Tamara Steffens: Valley, there's kind of a sense that a lot of traditional VC is driven by fear of missing out. And I kind of wonder whether FOMO is a factor for corporate VC or if it's a little more less exuberant, maybe. We are. Yeah, I would say that's a great way to put it. I'd say we're less emotional when it comes to getting into deals. And I think and again, And I speak to legal and tax in particular because it is crazy, right? I mean, some of the things that have happened, particularly in legal, and we know the market, right? We understand every customer out there. We understand what's happening. Yes, we do think the addressable market is increasing quite a bit.

23:06So that's great because now you do have more as far as, you know, potential revenue and potential customers. So it's great. But it yeah, some of it is just it's unreasonable valuations that really don't make sense. And it goes back to what you and I just discussed is how do you what's the exit here? How are you possibly, you know, going to get the return on this valuation? I don't know. So, no, we don't mind if we lose those because we're definitely in it to make money. We're a financial fund. So we're looking at, you know, how to get the best return, the most in a reasonable time frame. So Series A, right?

23:58So it's still seven to 10 years. But yeah, when something's at billions of dollars, there's only one way out.

24:05Tamara Steffens: How many of the people you're working with are teams like versus solo founders? Gosh, I would say maybe our portfolio is probably half and half. I'm just thinking about it. But we tend to work with the whole team. So if maybe there's a head of product because we're doing integration, that person, we may have more interaction with them for a period of time and kind of go back to the founder, you know, chief revenue, chief salesperson. Sometimes that's the person we're dealing with, you know, on a pretty regular basis because it's pipeline. So I think it depends on where we're going to start. Right.

24:52Is it going to be product integration? Is it going to be go to market? it, you know, and then we decide who the key person is on their side. But as far as founders go, I'd say it's a mix, right? Probably half and half. Some are co-founders and some are individual founders.

25:11Tamara Steffens: I've heard a lot of investors say, you know, they can usually tell in the first, if not the first five minutes, the first 30 seconds, whether they're going to invest. When you meet a founder for the first time, what are you really evaluating them for or on in that first 10 minutes? Yeah, I definitely don't think I look at anything in the first 30 seconds and decide. I've definitely seen ideas or gotten a deck in advance, right? So I'll look at something in advance and I'll be like, I love this category or I've been looking at a particular category, so I like something. So it may be really interesting to me even before we get a chance to meet if they'll send something in advance.

25:57Again, I think founders that understand the journey of how they're going to get from point A to point B, at least over the next couple of years, that's what I'm looking for, like thought process. Like, do they understand what it's going to take to get, you know, these deals done and get these customers happy, right? And, you know, we've certainly been wrong on, you know, on a few, but I would say for the most part, we, we have the ability to do diligence, I think more so than a traditional VC firm, right? We've engineers, a lot of crazy great engineers that we, we can ask to take a look at the solution and see, you know, where does it fit?

26:45You know, we can even test the solution. Oftentimes we've product people who can understand what the product market, we've already done strategy around certain product, you know, areas. We know what our customers are asking for. We have customers we can bring in of our own that can talk to them and see if there's a fit and, you know, get some questions answered there. So we have the ability to do pretty deep diligence more so I think than most, you know, traditional BC funds. So we can make pretty intelligent decisions just based on our process. So I think it's very advantageous.

27:25Tamara Steffens: About how long, so if things go really well, how long between that initial discovery meeting, your due diligence, and then the money hitting my account? Yeah. I mean, we've done deals in a two week, you know, turnaround time, um, from meeting the founder to writing the check. So we've done things really fast. Um, I would say average is four weeks, maybe four to five weeks. Um, and it usually that's pretty acceptable to them. We check like, well, like where are you in your process? You know, if we can get in earlier, that's better. So we do tend to start talking to them when they've gotten their seed round or their pre-seed round.

28:10Because again, if we can get them into a couple of customers or talking to our product teams, we'll know, you know, we're pretty, you know, we're ready, right? We can get a lot of diligence done. And sometimes we'll be talking to them before they'll even go through the process to raise so that, you know, when they get that term sheet, because we won't leave. We will only follow. Now, check size wise, in many cases, we've written the bigger check, right? So we don't make it that public. But if it's legal tech or tax tech that we really like, we will try to write a very large check so that we own enough of it to make it worthwhile, right?

28:53We're not looking to get 1 % in a deal, right? That's not enough for us to put the effort in to go make it happen. So we will walk away from deals where we can't get the right percentage as well.

29:05Tamara Steffens: If I'm a seed stage founder working in, you know, tax or legal tech, how, and I'm not ready to raise for a series A right now, how can I build a relationship with Thompson Rogers Ventures? Like before I'm ready to raise? Yeah, I mean, we'll bring you, we'll still do a partnership and bring you into customers. You know, if we really like it and we know you're going to raise a series A, we'll do a note ahead of time. We've done a few of those as well and they'll convert at the at the Series A. Sometimes it's great to have us in before because the venture funds do know what we do in tax and legal.

29:42So they're excited that, you know, we're already in there working with them and getting them into customers. There's a tremendous amount of credibility with the brand in those categories. So sometimes we'll write a note ahead of time.

29:58Tamara Steffens: And what, I mean, I'm sure it's all over the map as far as the founder and the problem they're solving. But like when you look back, what are the things that made you lean in super fast as far as we got to close this and get them on the books? Well, you know, for us in legal, it's been vertical applications. So patents, plaintiff law. We love M &A. We did debt transactions. So very specific, big, like a lot of a large TAM, right. A lot of firms are needed or a lot of corporate corporate legal teams need it. So that we look at from a from that perspective. And so if it's something that, you know, category that's they've really automated, we know like we we looked at solve intelligence, which does patent work.

30:56work, AI based patent legal tech, it just was crazy. It's so good. And, you know, we just kept saying, when are you raising, you know, when can we be involved? Right. And so, you know, we, once we saw the solution, we knew right away, we, we, we are, we've seen everything. We probably see more legal tech than anybody out there because people come to us first. So if we see something great, we do jump on it as quick as possible.

31:30Tamara Steffens: What's one question you wish founders would ask you, but they almost never do?

31:39I would hope founders would ask more about exit opportunities, not necessarily with us, although we are, you know, certainly, um, um, a very acquisitive, um, tech company. So we do buy a lot of, uh, a lot of tech, but I would, I would hope founders would say, um, once, especially once we've invested, what are you, where are you thinking we should exit? What is, what are our exit options? Always looking at not just the potential IPO, but where else they could exit. Not in year one or year two, right? But year three or four, they should start thinking about where are we going? In year five or six, they're going to want to know what is their exit strategy, right?

32:30Are they going to push it and go public or are they going to sell the company?

32:37Tamara Steffens: A lot of investors will say the term, you know, a lifestyle business, and they'll say it kind of derisively. What does that mean to you as far as is that on the table for Thompson Reuters Ventures? No, I mean, we won't invest in a lifestyle business. To me, a lifestyle business is something where you can generate, you can be really profitable, generate millions of dollars, but it's never going to be hundreds of millions of dollars, right? It'll be very consistent. You can own a specific category, a market, a niche item. And therefore, it becomes a lifestyle business, right? And good for you. You know, don't raise, though.

33:23If you've got a lifestyle business and that's the direction or where it can go, why not, right? Just make the money yourself and be happy.

33:33Tamara Steffens: Not the middleman, I guess. Yeah. But I mean, how many of those do you actually, how many of those come across your desk that you actually see? A few. I mean, I would say, you know, maybe 10%. And I'll just say that. I'll be like, this is too niche for us. I do think this is a lifestyle business. I think it's great. I think your tech is great, but don't raise, don't bother. Just go to market and make the money and, you know, keep it. Or figure out how to broaden your addressable market so that you have enough TAM that you can make, you know. But the product has to fit that too, right? so they'd have to be able to make sure they were, you know, knowing how to expand the product.

34:12Tamara Steffens: For somebody who's listening, hasn't quit their job yet, they have an idea for something, but they haven't actually, you know, executed yet or even talked to anybody else about it. What's one experiment they could do next Monday or something they could run in the next month or two to kind of just validate their idea before they take the leap and see whether they're actually building something real and useful. Yeah. I think it depends categorically where it sits, right? And who that customer is going to be. They really need to be able to outline it enough or, I mean, fortunately now with a lot of the, you know, you can come up with a MVP pretty quick, right?

34:51You can probably develop it yourself using Lovable or something, you know, and just put something together. I would get it in front of whatever customer it is you think is going to want this solution. So you've come up with the idea. I would go out and find a couple of, you know, law firms, county firms, you know, tax departments, whatever, um, where you can find a mentor or somebody that will actually understand what it is you're trying to build, you know, show them something and hammer it out and determine, is this a big enough space? Is somebody actually going to go after that?

35:32Tamara Steffens: Tamara, this has been a great call. Thank you so much for the time and the perspective. I believe we covered a lot of ground here. Thanks. Yeah. Thank you, Walter. It's been fantastic. The fun build scale theme was written by Michael Tritter and performed by Michael and Carlos Chayrez. Michael also composed Ocean, the track he heard at the top. If you enjoyed the episode, please subscribe and leave a rating. It helps more people find the show. You can get the Fund Build Scale newsletter on Beehive, follow along on Instagram, and if you have a guest suggestion or a question, reach me at fundbuildscale at gmail.com.

36:07Tamara Steffens: Thanks for listening. Fund Build Scale is a production of Truth and Soul Media, LLC.