Jean Sini (Partech): We like to see Series A companies with traction.
25 Sep, 2020
Anurag Chandra is a Venture Partner at Fort Ross Venture, who has been a member of the Silicon Valley tech community for about 20 years. His experience includes investing (NXT Capital Venture Finance, Lighthouse Capital Partners, Galleon Crossover Fund) and operating (senior executive roles at venture-backed companies). Anurag Chandra serves on the Board of Directors at Upaya and is a mentor at accelerator Imagine H20. He is also a Trustee and Investment Committee member for the San Jose Federated Employees Pension Fund. Anurag Chandra has also been a coach to Astia (women’s technology cluster) companies.
It’s one of these things that’s more organic. I had been doing some stuff in my mid-twenties. I tried to raise money for various types of form direct investment projects in India. And I was struggling to get any of my deals closed. My deals ranged from real estate buildings, malls and entertainment centers to energy buildings, cogeneration plants (India doesn’t have enough electricity even for this day for the entire population). And I worked on some technology deals: as we all know, India has some strong technical talent.
And after this experience and all of the difficulties, I stumbled the friend’s father, who was a bit of a mentor to me, to figure out where I would take my career because I felt like such a failure, and, as a young person trying his ambitious entrepreneurial idea, that was struggling. And he helped me think about the things I enjoyed doing the most, and we quickly realized that of all the projects I’ve worked on I enjoyed the technology ones the most. I was living in Los Angeles at the time (I’m originally from New York, but I’ve moved to California to attend university, made my way to Los Angeles), so he said to me: “Listen, if you love technology, you should get yourself back up to the Bay Area.” He said that it was booming at that time, it was the 1997–1999 period.
And he said: “You know, there’s some start for talents: even though you don’t have direct tech experience, they will recognize that you have good accomplishments for someone your age. And I’m sure you can find a job somewhere.” But he said: “You don’t really understand how the Silicon Valley game is played. It’s much more important to get a really good education. If I were you, I’d go to work for a venture capital fund, so you can learn as much as possible about who the good investors are and which are the better industries to pursue, who are the really good founders. And you’ll just get an apprenticeship.”
So I tried this round to talk to 5 or 6 VCs and to some that he introduced me to, and they all said “no” except one, a gentleman named Edge Scott, who gave me a chance to join him at Imperial Ventures. And I did that, and the rest is history. I fell in love with the whole entrepreneurship and fast-moving markets, and the energy of the very intelligent and risk-taking people who are a part of the venture capital ecosystem.
Fort Ross is much more recent. I met Victor Orlovski in 2016, he was moving from Moscow to Silicon Valley to launch his second fund. I think he recognized with his first fund that it was very difficult to find the best companies and to do good due diligence on companies in Silicon Valley when you are living in Moscow, so he decided to move here. And he spent some time with local VCs, and they told him that it was important for him to get a local partner who understood the local terrain, had a network, had done deals before, knew how to avoid adverse selection. They introduced us and we hit it off. It was just like to immediately find someone who you like as a person.
And so we continued to explore for one year: while he was raising the fund, I gave him a lot of my advice and guidance on fundraising because I’ve done it before, we’ve talked a lot about the strategy of where the fund should invest. And then, when we did the first close in august of 2017, we had enough experience with one another, and we enjoyed working with each other, and so we’ve decided to make it formal. That’s how I met Fort Ross, we’re mutual friends, and that’s about the time when I joined.
Geographically we prefer the US and Israel because within those two geographies we like to invest in and these two geographies we know the best: we have people on the ground there. So that makes a big difference.
We like to invest in enterprise technologies, fintech, cloud, cybersecurity, and we also like different types of applications that are built on artificial intelligence and machine learning models. And we do consumer as well. We’re not big on e-commerce, but we do like marketplaces. The common marketplaces like Airbnb and those types of companies: we like the network effect that they can generate.
And then, stagewise, we like to invest at mid-stage, which is typically after companies raise series A. So we will start to look at companies who are around series B, C, maybe D. We like to see close to 10 million in trailing revenue. We want to know that the company has figured out how to sell its product and sell it to a slightly wider base than just a few customers, and then we want to come in and to help expand their fields in marketing, maybe introduce them into the Eastern European market to help it scale faster.
They would have to be in one of those geographies, they would have to be in one of those sectors that we like. And they would have to demonstrate that they already have a diverse customer base where they are not just selling to a few friends, but they are selling more widely to the market. When we see all of those elements, we’ll take a quick first look and dive deeper to see if we like the other elements of the company.
The company that was unusual, and I made a mistake was in 1998. I met eBay when there were just 20 people in the office in San Jose, and I met Pierre Omidyar, the founder, and the first president, Jeff Skoll. And actually, for a while, Jeff and I stayed friendly and we would see each other for coffee or for beers, but I’ve since lost touch with him. And I liked them a lot, and I thought the company was interesting. But it seemed at that time unusual to me because I didn’t believe that people would have this social trust across the internet when they couldn’t deliver whatever they were selling by hand and make sure that they were getting the money back. This was before PayPal existed, so people would actually send things and then wait for the check to be mailed. And I’ve always thought that it was going to be a niche product, that there’d be just a very few people who’d be willing to sell and buy things this way. And boy, was I ever wrong! That was the opportunity I’ve missed.
So I remember leaving that meeting with my partner, and we got in the car and he said: “Boy, those are great guys, and they are really smart, but this just seems like it’s a small business, it seems like a garage sale on the internet, and it won’t ever scale into something really big.” So, at the time it seemed like an unusual pitch. I don’t think anyone considers it unusual now because eBay is such a big company. But perhaps, if more people had met it earlier as I did, they might find it unusual as well.
In general, we are looking for a team that complements one another. We don’t like teams where you have two or three people who are really the same. So if you have three friends who’ve founded the company, all come from some top technical university, and if one of them has changed his or her career path to become a marketing person or salesperson, that’s great. But if it’s truly three coders and three technical people, and three people focused just on a product, you don’t have the right complement of skills in the team.
I’m fond of saying that if you and I were to start a brand new basketball team, it wouldn’t be competitive if we found five players who all play the same position. We would want them to play point guard, guard, forward, and center. And this is what we look for in our teams as well.
But beyond that, to be more specific, for our stage, the mid-stage, it’s very important that there is a good sales and marketing talent who knows how to make sales and marketing operation efficient and who can make it repeatable and scalable. And if the company is missing that, then we try very hard to help them both with our own network and our own capabilities with customers, but also to help to identify the person who can occupy that role in the company.
That would not be relevant for Fort Ross. By the time you get to Fort Ross, to our stage, the company would be many people. I’m happy to share my general philosophy though because I have done early-stage investing. There are some good examples of solo-founder founded companies, but even if you look at Facebook: Mark Zuckerberg was the founder of Facebook, but he did have a couple of junior co-founders, right? Maybe they had less equity, but they were involved early on.
The toughest thing for a young startup is to go raise money and also operate the company at the same time. You don’t have many employees, you don’t have many people, and so it’s good to have at least two co-founders. Because one will be on the road raising money, and that’s a very time-consuming job, and the other has to hit the company’s milestones and execute so that the company is attractive for the next round of capital. And it’s hard to be one person and do both of those jobs at the same time, you basically have to clone yourself. So in the early stage, I feel it is much more comfortable when you have a couple of founders rather than one founder. I wouldn’t call that a black and white rule, but that’s my bias.
The top of our funnel, the companies that we see, are probably thousands in a year. Now, we don’t sit down and do due diligence on a thousand, we are very quick at screening. There are some good services like CB Insights and Pitchbook, and there are some interesting blogs, and there are some good conferences to go to. So we are able to get exposure to a lot of companies. But we probably drill down and spend a lot of time working with on an annual basis about 100. And out of that 100, we end up doing in a given year anywhere from 3 to 6 deals. That’s the math.
We don’t have a special application process. We do get a lot of cold calls where people just send an email. I’m sure there are people who buy lists of venture capital firms, and then they just create an email campaign, and they send basically the same email to hundreds of VCs. I find those in my inbox almost on a daily basis, so is Victor, so are our other three partners. That happens really frequently. We rarely respond to those, it’s too hard to respond to all of them, we don’t have enough contact.
We really rely on two sources. One is our personal relationships with entrepreneurs. I’ve been in the Valley for 20 years now, so we use my network, and Victor’s because he has such an impressive background from what he did with Sberbank, he’s been able to attract and to create a very good network of VCs as well here in Silicon Valley. So, they would often call us, they know who we are, they know the stage we like to invest, they know the type of technologies we like to invest in. And more importantly, they know what are our capabilities are to help to add value to these companies. So, we get a lot of them calling us or telling their companies to reach out to us. And many times the entrepreneur on that network would have remembered – maybe they’ve dealt with me on The Galleon or NXT, or Lighthouse, that would be another source. These are all warm sources. These are where people know each other, so there’s a bit more social trust in the quality.
And then, the second thing we do is we proactively use those conferences and those research tools that I’ve mentioned to use certain screening criteria and use our own very simple algorithm. We’ll screen companies, and then we have a team of analysts who will review them and say: “Hey, this looks like a good fit for us!” And then they will present it to the partners, and the partners will say “Oh, yeah, we agree.” or “We disagree.” And if we agree, many times we’ll say: “Oh, look at that, Foundation Capital is in the cap table. Let’s then talk to Charles or Rodolfo.” So if we know one of the guys there, this means we can get an introduction to the partner who is in the company. So we try to be more proactive and more dependent on our organic network.
It’s very hard to answer all the emails in a meaningful way. And I get a lot of this on LinkedIn as well. And most of them are so outside of targets, some of them are too early stage, so it’s not as fruitful as the process that I’ve just described.
It varies for different companies, but if you want a rule of thumb, I’d say it’s 4–6 weeks for due diligence and 3–4 weeks for legal negotiating and legal due diligence, and final execution of the documents, and wiring of the money. Because you have to keep in mind that venture capitalists invest in syndicates. It’s rare that we are going to be the one putting all the money into the round. So you have multiple parties that are doing some of their own diligence, and some of the companies are juggling a few different investors at the same time.
So it’s 4–6 weeks, 4 is really early, 6 is much more standard. I’d say 45 days due diligence, and then 30 days of legal. We have moved faster. There have been situations when we had to move much faster than that.
There’s nothing magical there. We evaluate everything. We evaluate the team, we do reference checks on the team, we form our opinion on the team. We analyze the product: anytime when the product has technical sophistication beyond our capabilities, we use third parties to better understand it. We take the financials and we are very metrics-driven, so we look at the metrics as they layout, we look at the projections, we create our own point of view, we basically create our own projections.
We spend a lot of time with the company understanding (this is very fundamental and key, understanding their assumptions), why are they saying they are going to do X, Y, and Z in a year from now. Challenging their assumptions and understanding them is very important because you get a sense of how the management team is thinking because very few people hit or exceed their projections. You want to know what their thought process is, so when they have on the performance, you know how they are going to think or react and try to correct the course.
So we do good old-fashioned due diligence across all of the areas of the company.
It’s 5–10 million dollars.
If you don’t fit our profile or you have too little revenue traction. We tell people what our criteria are, our metrics, and the companies will say: “Oh, yeah, we fit that.” And then we begin the first meeting and we’ll see that they don’t: “You guys only did 3 million revenue last year.” And they’ll say: “Well, this year we are going to do 12!” And we’ll say: “Well, we thought we were pretty clear with our criteria that we wanted to see 10 million trailing revenue, (or 8–9 million). So you just don’t fit our profile, you don’t fit our box.” If you’re in cleantech or life sciences, and these are industries that we don’t invest in because we don’t have any domain expertise for any of these things, that tends to be a red flag, if you want to call it so. I don’t even know if that’s fair, but those tend to be the reasons why we screen something out or say no. That’s the most often.
And then, in terms of companies that do fit our criteria, why do we kick them out and say no? What would be red flags? Well, one red flag is when we just don’t trust the management teams’ numbers, when we think they are too aggressive. And I come back to the assumption if they can’t walk us through a good logic as to why they’ve built their business plan the way they have because we won’t be able to get comfortable with their thinking. That’s one red flag.
Another red flag for us is if the company has raised a lot of money, but only has mediocre results. It means they haven’t spent their money wisely and efficiently. And even if they are okay with the flat valuation or a down valuation, we tend to be a little bit uncomfortable with that. Because you need some catalyst to change the company’s direction. And with the exact same people and the exact same approach, and all this money has been spent and you haven’t been able to get the results that you’ve projected, there’s really no reason to believe something new will change in the business. That’s another red flag for us.
The third red flag tends to be for us around the product area: if we believe that the product isn’t scalable, and we do our independent work on that, if we believe the product is too specific to a niche or too limited in its functions and capabilities. Yeah, sure, you’ve got 10 or 15 million in revenue, but if it doesn’t have wider applicability, that tends to be another red flag for us.
And then, the last one is if we think your sales and marketing approach doesn’t fit your product type. If you are getting low ACDs or your efficiency in your sales model is really low because you should be using telesales people but instead, you’re using account executives who are expensive, we look at that. There are many companies that can get to our initial revenue threshold, but they don’t really have the right kind of sales and marketing engine built against the type of product they are selling. Those are the typical red flags for us.
Both. There’s no one thing without the other in life. It’s going to hurt a lot of companies in the venture capital ecosystem, and many will not recover from this. And there will be companies both that thrive during this time period, and there will be early-stage companies that get started now, who don’t have to worry about revenue, who can quietly build their product. And they will benefit from the fact that being convincible not doing any new product development now, they will be licking their wounds right now, trying to maintain whatever revenue base they have currently and they won’t be trying new sophisticated products. And this is an opportunity for early-stage startups who don’t have to worry about revenue creation, it’s up to them to fill that space.
Zoom is a perfect example of a company that is thriving right now and has seen its revenue explode because of the Coronavirus. And then, there are companies like Airbnb, that if Coronavirus quarantine lasts till 2021, you may see one of the best unicorns I’ve seen built – I don’t know their financial numbers off the top of my head – but if Corona has a long hibernation, up to 24 months, you could see their business model ruined. So COVID-19 is helping Zoom and hurting Airbnb.
We’re not conservative, so we are open for business, we are looking at companies, and there’s a very high bar, but if we like something, and the evaluation is right, we’ll certainly do the deal right now. But most companies will probably have a very tough time convincing venture capitalists that they have a good grasp of what their revenue projection can look like. Some might have an opportunity who might find the equivalent of the Zoom, and that would be great. But there’s going to be a lot of companies, who say “Hey, we’re going to do X million in revenue,” and you say “Well, how do you really know? We don’t know if this is going to be a quick economic recovery or a slow economic recovery.” So we have to judge each company individually, and we’re not conservative, we’re not aggressive, we’re Fort Ross, we’re no different today than we were before COVID started. But COVID is adding new due diligence criteria for us to have to think about.
We don’t have the expertise on our team to do things in the biomedical field. And I think there are some very interesting things going on with bioinformatics. I think the next potential revolution could be in med space. And maybe in the future, in the next fund, maybe we will have a partner (and by the way, this is me talking, it’s not anything that Yacov, Vicktor, Sharin or Ratan would have agreed to), I think that in bioinformatics the sequencing of the human genome and now the sequencing at the proteomics level will create an opportunity similar to what the semiconductor chip did in the 60s. The creation of the semiconductor chip is the platform on which all of the techs that we know, and I invest in, and Fort Ross, is built on. Even software owns its existence to the hardware that it sits on, and hardware is based on the x86 processor, so it’s that foundational.
I think we may be in an era right now where life sciences are creating similar platforms. That will make the drug discovery and the prolongation of human life and all that much more repeatable. Right now in biology, there’s a lot of trial and error, there are different receipts for these drugs, there’s a lot of trial on animals, and then on human beings, and then some work and some don’t, and it takes many years. I think that the whole process is going to become more platform and happen much faster. And artificial intelligence has a big role to play in that.
So I think that the whole area is really exciting. My father was a professor at medical school, perhaps I should have followed him a little bit more on his footstep, then I would be prepared to take advantage of this opportunity, but I don’t have that background. But I think that’s a pretty cool area.
I think the answer is no. The closest would be LinkedIn back in 2003–2004 at my VC firm when I was with them. We were making an investment in LinkedIn, we understood the hypothesis, the company was not yet generating revenue, it was something it was planning on doing later, so it was not clear that there was a demand from recruiters for the database that LinkedIn was building. At that point, it was mostly headhunters, these talent agencies that would call on the company’s behalf and help them staff up.
The idea that people would go through all these resumes that people would self-post online I don’t think it took a lot of imagination to see why would this work, but it’s the closest one I can answer where there was no demand yet generated by the recruiters. Because remember, there’s a professional subscription you can get, which costs somewhere about $50 a year, and they give you all these extra capabilities for your searching and all that kind of stuff. They weren’t doing this in the first 4–5 years. Basically you put your resume for free, and it really, to speak in a social way, for professionals to connect. And the idea that the recruiters would pay a monthly fee to be able to access this with some virtual analytics that LinkedIn would provide, it made a lot of sense, but it hadn’t been proven yet.
I’ve been here since I’ve moved from the East Coast to come here to university, and I really loved the business culture in the 90s here, in Silicon Valley. It was very collaborative, it was very collegial, and it was kind of a cottage industry.
And now venture capital is becoming a global phenomenon, there are big personalities, and it has become rather coarse to come in. All of these has changed the culture for the negative, it’s more like Wall Street or Hollywood in many ways. Which I don’t like at all. It’s not my personality.
But every week (well, of course, it can’t happen right now during COVID, it has to be by Zoom, but outside of COVID) people walk into my office to pitch me a business idea. And it’s usually 2–4 people sitting across of me at the table, and I’m always so inspired by their story. And I love the risk-taking, I love the personality that’s required to say “I’m going to take this risk, I have this conviction and belief in this product. And I’m going to sit here and try to convince this person that they should partner with me on my long journey.” And I find that to be very fulfilling.
So I’m happy to be where I am in my career even though I think there are many aspects of venture capital now that are disappointing or even nauseating at times, but those entrepreneurs make it real and make it really rewarding to be a part of their journey when we’re able to strike a deal with them.