Personal blog of Yzmir Ramirez

In spite of the pandemic, New York City remains the center of commerce and business, and over the last decade a robust startup community has developed there. Work-Bench, the NYC VC firm that concentrates on early-stage enterprise seed investments, announced its $100 million Fund 3 this morning.

The company started back in 2013, when most investment was still concentrated in Silicon Valley, but founders Jonathan Lehr and Jessica Lin believed there was room for a new firm in NYC that concentrated on writing first checks for enterprise startups. The founding team knew IT and believed that with the concentration of Fortune 500 companies in the city, they could build something that took advantage of that proximity.

The bet has paid off in a big way with investments in successful startups like Cockroach Labs, Catalyst, Dialpad and FireHydrant (all companies TechCrunch has covered). Big exits include CoreOs, which Red Hat acquired for $250 million in 2018.

Writing in a blog post announcing the new fund, Lehr and Lin said their initial idea has grown far beyond anything they could have hoped for in those early days. “By utilizing our deep corporate network of Fortune 500 customers here in NYC, we can get conviction in companies early on, and before they have the metrics other VC firms require. It’s also through this network of customers that we can land critical early customer logos and through our extensive community events and playbooks that we can enable pivotal knowledge sharing,” the two founders wrote.

Lehr says, even with the pandemic, which could have allowed it to expand its reach, the company is mostly sticking to its NYC focus with the majority of investments based there. “This may sound ironic, but while businesses went virtual, the pandemic reinforced our focus on New York City. Our city was hit first and hardest by COVID, but despite it all, VC funding activity for local enterprise startups actually increased substantially during the pandemic. Along with that, with so many Fortune 500s in NYC all going through accelerated digital transformation during the pandemic, there was a ton of work to be done and numerous customer opportunities right here in our own backyard,” Lehr said.

He says that the $47 million Fund 2 portfolio was deployed to 70% NYC-based startups, and he predicts that Fund 3 will have a similar composition, if not slightly more concentrated in New York.

The company didn’t just decide to write first checks though, it tried to build the community by offering workspace in their offices where early-stage companies could feed off one another (at least until the pandemic came along). The founders have also offered events where various speakers came to their offices, hosting hundreds of events since inception, while going virtual when the pandemic closed down in-person gatherings.

Lehr says as the company deploys Fund 3 money, it is looking for ways to invest in a more diverse group of founders. “Right now, 20% of our portfolio is made up of women founders. While we are proud of that number within an enterprise context, we believe there is so much room for improvement. As we’ve learned, deal flow doesn’t become diverse on its own — you need to make it diverse, which is why we place a huge emphasis on identifying and amplifying the voices of women and diverse founders within our own Investment Committee meetings and across the rest of the VC and enterprise tech community.”

The company will continue to look at enterprise startups, particularly in New York City, as it looks to distribute these new funds.

When I spoke to Robert Ross, CEO and co-founder at FireHydrant, we had a technology adventure. First the audio wasn’t working correctly on Zoom, then Google Meet. Finally we used cell phones to complete the interview. It was like a case study in what FireHydrant is designed to do — help companies manage incidents and recover more quickly when things go wrong with their services.

Today the company announced an $8 million Series A from Menlo Ventures and Work-Bench. That brings the total raised to $9.5 million, including the $1.5 million seed round we reported on last April.

In the middle of a pandemic with certain services under unheard of pressure, understanding what to do when your systems crash has become increasingly important. FireHydrant has literally developed a playbook to help companies recover faster.

These run books are digital documents that are unique to each company and include what to do to help manage the recovery process. Some of that is administrative. For example, certain people have to be notified by email, a Jira ticket has to be generated and a Slack channel opened to provide a communications conduit for the team.

While Ross says you can’t define the exact recovery process itself because each incident tends to be unique, you can set up an organized response to an incident and that can help you get to work on the recovery much more quickly. That ability to manage an incident can be a difference maker when it comes to getting your system back to a steady state.

Ross is a former site reliability engineer (SRE) himself. He has experienced the kinds of problems his company is trying to solve, and that background was something that attracted investor Matt Murphy from Menlo Ventures.

“I love his authentic perspective, as a former SRE, on the problem and how to create something that would make the SRE function and processes better for all. That value prop really resonated with us in a time when the shift to online is accelerating and remote coordination between people tasked with identifying and fixing problems is at all time high in terms of its importance. Ultimately we’re headed toward more and more automation in problem resolution and FH helps pave the way,” Murphy told TechCrunch.

It’s not easy being an early-stage company in the current climate, but Ross believes his company has created something that will resonate, perhaps even more right now. As he says, every company has incidents, and how you react can define you as a company. Having tooling to help you manage that process helps give you structure at a time you need it most.

The job of an early-stage startup founder is challenging in good times, never mind a crash like the one we are experiencing today.

While most expect private investing to slow down, it’s clear that some investments are still happening in spite of the pandemic, if the stories we are writing on TechCrunch are any indication.

But the downturn is bound to have an impact on the types of deals that receive funding; any startup that offers a good or service requiring human interaction or installation will face an uphill battle, at least in the short term. That said, enterprise SaaS vendors, especially ones that solve hard problems, help with work-from-home or collaboration, or better yet, help increase efficiency and save money, are still very much in demand.

Nobody can do anything about the CIO who is hunkering down until things improve — but that’s not everyone. Companies might be thinking twice about where they spend money, but some are still helping drive the net-new, post-COVID-19 investments happening from seed to late stage across many sectors.

We looked at data and spoke to a couple of enterprise-focused, NYC-based seed investors to better understand their investing cadence. Nobody painted a rosy picture of today’s climate, but seed investors were never about immediate gratification, especially where enterprise startups are concerned. That means, if a seed-stage investor believes in the founders and their vision and the company can ride out today’s economic upset, there’s still money in the till — at least for now.

Seed investment generally in decline

Earlier this week, the Equity crew caught up with Work-Bench investor Jon Lehr to get his take on the current market, and how his firm goes about making investment decisions.

The conversation was a treat, so we cut a piece of it off for everyone to listen to. The full audio and a loose transcript are also available after the jump.

What did Danny and Alex learn while talking to Lehr? A few things, including what Seed II-level investments need these days to be attractive (Hint: It’s not a raw ARR threshold), and what’s going on in SaaS today (deals slowing, but not for select founders; relationships are key to doing deals today), and why being a VC is actually work.

But what stood out the most was how Lehr thinks about finding investment opportunities. While some VCs like to cultivate images of being gut-investors, cutting checks based on first meetings and the like, Lehr told TechCrunch about how he researches the market to find pain-points, and then the startups that might solve those issues.

You can listen to that bit of the chat in the clip below:

Extra Crunch subscribers, the rest of the goodies are below. (A big thanks to Danny for cleaning up the written transcript.)

The audio

FireHydrant, an NYC startup, wants to help companies recover from IT disasters more quickly, and understand why they happened — with the goal of preventing similar future scenarios from happening again. Today, the fledgling startup announced a $1.5 million seed investment from Work-Bench, a New York City venture capital firm that invests in early-stage enterprise startups.

In addition to the funding, the company announced it was opening registration for its FireHydrant incident management platform. The product has been designed with Google’s Site Reliability Engineering (SRE) methodology in mind, but company co-founder and CEO Bobby Ross says the tool is designed to help anyone understand the cause of a disaster, regardless of what happened, and whether they practice SRE or not.

“I had been involved in several fire fighting scenarios — from production databases being dropped to Kubernetes upgrades gone wrong — and every incident had a common theme: ?absolute chaos?,” Ross wrote in a blog post announcing the new product.

The product has two main purposes, according to Ross. It helps you figure out what’s happening as you attempt to recover from an ongoing disaster scenario, and once you’ve put out the fire, it lets you do a post-mortem to figure out exactly what happened with the hope of making sure that particular disaster doesn’t happen again.

As Ross describes it, a tool like PagerDuty can alert you that there’s a problem, but FireHydrant lets you figure out what specifically is going wrong and how to solve it. He says that the tool works by analyzing change logs, as a change is often the primary culprit of IT incidents. When you have an incident, FireHydrant will surface that suspected change, so you can check it first.

“We’ll say, hey, you had something change recently in this vicinity where you have an alert going off. There is a high likelihood that this change was actually causing your incident. And we actually bubble that up and mark it as a suspect,” Ross explained.

Like so many startups, the company developed from a pain point the founders were feeling. The three founders were responsible for solving major outages at companies like Namely, DigitalOcean, CoreOS and Paperless Post.

But the actual idea for the company came about almost accidentally. In 2017, Ross was working on a series of videos and needed a way to explain what he was teaching. “I began writing every line of code with live commentary, and soon FireHydrant started to take the shape of what I envisioned as an SRE while at Namely, and I started to want it more than the video series. 40 hours of screencasts recorded later, I decided to stop recording and focus on the product…,” Ross wrote in the blog post.

Today it integrates with PagerDuty, GitHub and Slack, but the company is just getting started with the three founders, all engineers, working on the product and a handful of beta customers. It is planning to hire more engineers to keep building out the product. It’s early days, but if this tool works as described, it could go a long way toward solving the fire-fighting issues that every company faces at some point.

Work-Bench, an early-stage enterprise startup venture capital firm based in New York City, announced its $47 million Fund II today. It follows their initial $10 million fund.

Work-Bench is itself like a venture capital investment startup. A scrappy operation run by just five enterprise industry veterans, it defies convention in a number of ways, including setting up shop in New York City. While it’s based in New York, the company will invest anywhere in the country, writing checks for $1.5 million for Seed 2 and Series A investments.

Work-Bench’s philosophy centers around a sales approach and giving their startups entrée into some of the biggest companies in the country, many of which, not coincidentally, are based near their offices.

The company starts by trying to understand specific enterprise customer pain points, even before they send a founder in to pitch an executive. The startup founders are judged and guided by their ability to sell. In fact, one of the founders, Jonathan Lehr, says even before they invest in a company they will send them to pitch a couple of customers and take advantage of that two-way feedback channel as a way to understand the startup’s selling skills.

“Instead of starting with whiz-bang tech like a lot of West Coast VCs do, by starting with the problem and where budget dollars are being allocated, when we’re looking at companies from an investment perspective it really helps us connect all the dots a little a lot better. That’s because on the one hand the corporate executive is getting a solution to a pain point from the startup, and the startup founders are getting an introduction to the right stakeholder at the right time for them at the right organization,” Lehr told TechCrunch.

Work-Bench has set up their headquarters as space for hosting regular events that help introduce founders to key people in the community and learn about different subjects, such as writing a successful RFP, negotiating contracts and setting up a successful proof of concept (PoC). They also have work spaces where founders from the portfolio companies can interact on a daily basis and get direct feedback from the Work-Bench principals, who run a truly hands-on operation.

It seems to have worked. Among the enterprise startups funded with their initial fund were Dialpad, Tamr, Cockroach Labs and CoreOS, which was sold to Red Hat for $250 million in January. In all, they invested in 17 companies in the first fund.

The second fund is already under way with nine investments so far, including Scytale, a security and identity protocol startup; Algorithmia, which is working on DevOps for AI; and Catalyst, a customer success platform.

Fund II investors include co-anchors Industry Ventures and an unnamed Chicago family office. Corporate backers include Wipro, Schneider Electric and CA Technologies. Other investors include Fund I founders Craig Walker from Dialpad, Andy Palmer from Tamr and Tim Eades from vArmour.

Work-Bench, a New York City venture capital firm that spends a lot of time around Fortune 1000 companies, has put together The Work-Bench Enterprise Almanac: 2018 Edition, which you could think of as a State of the Enterprise report. It’s somewhat like Mary Meeker’s Internet Trends report, but with a focus on the tools and technologies that will be having a major impact on the enterprise in the coming year.

Perhaps the biggest take-away from the report could be that the end of SaaS as we’ve known could be coming if modern tools make it easier for companies to build software themselves. More on this later.

While the report writers state that their findings are based at least partly on anecdotal evidence, it is clearly an educated set of observations and predictions related to the company’s work with enterprise startups and the large companies they tend to target.

As they wrote in their Medium post launching the report, “Our primary aim is to help founders see the forest from the trees. For Fortune 1000 executives and other players in the ecosystem, it will help cut through the noise and marketing hype to see what really matters.” Whether that’s the case will be in the eye of the reader, but it’s a comprehensive attempt to document the state of the enterprise as they see it, and there are not too many who have done that.

The big picture

The report points out the broader landscape in which enterprise companies — startups and established players alike — are operating today. You have traditional tech companies like Cisco and HP, the mega cloud companies like Amazon, Microsoft and Google, the Growth Guard with companies like Snowflake, DataDog and Sumo Logic and the New Guard, those early stage enterprise companies gunning for the more established players.

 

As the report states, the mega cloud players are having a huge impact on the industry by providing the infrastructure services for startups to launch and grow without worrying about building their own data centers or scaling to meet increasing demand as a company develops.

The mega clouders also scoop up a fair number of startups. Yet they don’t devote quite the level of revenue to M&A as you might think based on how acquisitive the likes of Salesforce, Microsoft and Oracle have tended to be over the years. In fact, in spite of all the action and multi-billion deals we’ve seen, Work-Bench sees room for even more.

It’s worth pointing out that Work-Bench predicts Salesforce itself could become a target for mega cloud M&A action. They are predicting that either Amazon or Microsoft could buy the CRM giant. We saw such speculation several years ago and it turned out that Salesforce was too rich for even these company’s blood. While they may have more cash to spend, the price has probably only gone up as Salesforce acquires more and more companies and its revenue has surpassed $10 billion.

About those mega trends

The report dives into 4 main areas of coverage, none of which are likely to surprise you if you read about the enterprise regularly in this or other publications:

• Machine Learning
• Cloud
• Security
• SaaS

While all of these are really interconnected as SaaS is part of the cloud and all need security and will be (if they aren’t already) taking advantage of machine learning. Work-Bench is not seeing it in such simple terms, of course, diving into each area in detail.

The biggest take-away is perhaps that infrastructure could end up devouring SaaS in the long run. Software as a Service grew out of couple of earlier trends, the first being the rise of the Web as a way to deliver software, then the rise of mobile to move it beyond the desktop. The cloud-mobile connection is well documented and allowed companies like Uber and Airbnb, as just a couple of examples, to flourish by providing scalable infrastructure and a computer in our pockets to access their services whenever we needed them. These companies could never have existed without the combination of cloud-based infrastructure and mobile devices.

End of SaaS dominance?

But today, Work-Bench is saying that we are seeing some other trends that could be tipping the scales back to infrastructure. That includes containers and microservices, serverless, Database as a Service and React for building front ends. Work-Bench argues that if every company is truly a software company, these tools could make it easier for companies to build these kind of services cheaply and easily, and possibly bypass the SaaS vendors.

What’s more, they suggest that if these companies are doing mass customization to these services, then it might make more sense to build instead of buy, at least on one level. In the past, we have seen what happens when companies try to take these kinds of massive software projects on themselves and it hardly ever ended well. They were usually bulky, difficult to update and put the companies behind the curve competitively. Whether simplifying the entire developer tool kit would change that remains to be seen.

They don’t necessarily see companies running wholesale away from SaaS just yet to do this, but they do wonder if developers could push this trend inside of organizations as more tools appear on the landscape to make it easier to build your own.

The remainder of the report goes in depth into each of these trends, and this article just has scratched the surface of the information you’ll find there. The entire report is embedded below.