Exponent Co-Founder Eyes B2B Startups Riding ‘Growth Curves’

Mahdi Raza, co-founder and co-managing partner of Exponent Founders Capital, told Karen Webster that the landscape is changing for investors eyeing the digital transformation of various sectors — especially B2B.

“A good valuation does not make a good investment,” Raza said. And as investor FinTech forays have lost countless billions of dollars over the past few years, capital is ever-scarcer.

The very profile of the founders themselves have been changing too. As 2024 dawns, Raza — whose firm has, in the past, backed the likes of Robinhood and Plaid — now encounters more experienced executives helming startups.

Whereas in the heady days of the pandemic, young techies might have raced to raise $100 million of capital with scarcely-formed business models, no products or customers at launch and short-term exit strategies, now a more measured individual surfaces.

“The founders now are customer-centric, product-centric and are saying ‘this is going to be my life’s work and journey for the next 20 years,” Raza said. The seasoned founders have been ruminating on real-world problems for years, gathering real world, customer feedback and honing their software and services for the long haul.

For Exponent — the moniker reflects the fact that the founders are self-described “math nerds at heart,” as Raza said, somewhat self-effacingly — the key is to look for investments that will ride an “exponential growth curve.” The sweet spot for Exponent, he said, lies in investing in companies at inception, and to continue backing them all the way up to the first couple millions of dollars worth of top line.

“The barriers to innovation and entrepreneurship, year over year and decade over decade,” he said, “are going down, and that’s great for the economy and for GDP.”

First Principles — and Moving Toward Scale

Exponent’s guiding and first principles rest on finding firms that can scale, eventually, to hundreds of millions of dollars of revenue and cash flow (in turn generating significant returns on investment for its nonprofits, endowment and hospital clients). Exponent said last week that it launched a $75 million Fund II that will invest in companies operating in FinTech, enterprise software and applied artificial intelligence (AI), among other verticals.

No matter the vertical, he said, success lies in linking up with entrepreneurs that have been “chewing over” problems for years (and COVID kicked off a period of reinvention), crafting customer-driven product solutions and planning for a multi-decade, multi-generational period of growth.

“What matters is real products for real customers,” leading to “real commercialization,” said Raza. “That’s what gets us excited.” The firm takes a judicious approach to investments, backing one or two startups a quarter, he estimated.

The confluence of real-world problems and solutions — the meeting of friction and the appetite for change, he said — gives rise to an investing strategy that is more of a marathon, a hike, than a sprint.

Though Exponent finds opportunities in investing in consumer-facing firms, there’s particular appeal in backing firms that stake their claim in the B2B space. Exponent’s holdings are involved in everything from building solutions for small and medium-sized businesses (SMBs) across verticals such as construction.

Insurance, as an industry, may not be all that sexy in Silicon Valley, but carriers claims adjudicators and other stakeholders have shown a “high willingness to pay” for software and products that streamline and digitize workflows.

“You can later on some of the changes, on the technology side,” he said, “with AI and also with payments” so that platforms emerge that improve and personalize the experience for end customers, who expect a “consumerized” experience in B2B interactions.

“There are founders out there that are building solutions for hard problems, and for interesting customers,” he told Webster, adding that “these are the folks we’re excited to work with.”