Matt Melymuka co-founded PeakSpan Capital in 2015 with Phil Dur and Brian Mulvey. The firm, focused on growth investments in B2B software, in January closed its sophomore fund on $265 million, exceeding the $225 million target.
How do you differentiate as a firm in a market like software?
Over the last decade the number of startups and the amount of dry powder and AI have ballooned. And it created a lot of competition to get into the best companies. We at PeakSpan have developed several strategies to position ourselves as the best partners possible.
We do that through focus and specialization within B2B software. As partners we only focus on three themes each. We have three partners and altogether we cover [about] 10 themes.
My current themes are hospitality technology, sales and marketing technology [and] customer experience management technology. I am second-in-command on the third one.
The whole point is to develop domain expertise in those areas. We want to develop strategic rapport and provide more than just capital. We can provide expertise and deep understanding of these markets.
Another way we differentiate is through long-term relationship building with potential partners. We get to know the teams at the companies 12 months before we invest. During this time, we work on strategic projects and initiatives with the management teams to show them the impact we can create and offer. We want to show them impact in action, not just words. It’s more enterprise sales than inside sales.
Discuss your investing process.
We apply technology to every part of the investment process. We’ve been building proprietary software at PeakSpan for over 10 years now. Currently, we have two tools.
One, called ADA, ingests data from 63 online sources, including employee review websites like Glassdoor, financial filings and disclosures, customer review sites, etc. Then the software customizes the data, normalizes it and applies predictive algorithms to it, which we’ve built internally. We estimate revenue, revenue growth, capital efficiency, market buzz, customer sentiment. So, before we ever come in contact with private software companies, we have a directional sense for how big they are and how fast they’re growing.
We have estimated metrics for 500,000 B2B software companies. We then have senior partners reach out and engage with companies that are performing best based on those metrics.
Second, we have a software platform called Dewey, named after Dewey Decimal Classification system, which is essentially a catalog system in libraries.
For Dewey, we ingest data from over 500 periodicals. Currently, we have over 2 million articles in the platform. Dewey reads those articles and catalogs them; it also breaks them down on concepts and tags each concept. This helps our companies with marketing and with controlling the dialog and positioning.
How do you navigate high valuations?
It’s no secret that valuations in software are very high right now. Certain categories in software are extremely overvalued right now; for instance, cryptocurrency tools and cryptocurrency platforms. There’s been so much investment in these tools, it’s just crazy.
We invest in categories where there is substance. We look for opportunities where the teams we partner with focus on more than just getting the highest valuation, such as on getting the best partners for their business. If you are selling your house, all you care is the highest price, but if you are renting out a room in your house, you care about many things. In growth investing you look for the best partner that can bring the best value possible. And we are doing it by doing real work for these companies, so they get a real sense for what we can deliver.
What’s also interesting is when the public market turns and comes back to reality, we see about a two-quarter lag in private markets. I would expect that to happen as we are about to enter a potentially worsening environment. We expect valuations to come down a bit.
Which recent deal represents what you do at PeakSpan?
We invested in Cordial in summer 2018, led the Series B financing, the $15 million round, with more than half of [that] $15 million. The company helps brands to provide personalized messages to customers across any device and any channel in real time, incorporating real-time event data.
Cordial ingests data from different sources to understand consumer behavior and then delivers a message on a channel where you are most likely to engage with it: can be email, Instagram or another social-media platform. For instance, the consumer brand Revolve is using Cordial to deliver highly personalized emails.
Cordial is a great example of what we look for in companies. We see a lot of companies that are trying to grow and hire too quickly. The companies that we like are the ones with very focused and methodical approaches. There are a lot of companies right now in this market that are trying to do too much and too quickly.
What are your return expectations in 2019, given high valuations and more capital-market volatility?
Our expectations in both good and bad economic times are the same: 3x and more. The companies we invest in should be resilient to bad economic environments. All our companies are positioned very well in their categories. We think 2019 is going to be another great year.
This piece was edited for clarity
Action Item: Call Matt Melymuka at +1 212-899-9802