Heidi Roizen (Threshold Ventures): On average our investment period is somewhere around 6-7 years. It’s longer than the average marriage in the United States. Take your VCs very carefully
26 Oct, 2020
Matthew Le Merle and his wife Alison Davis are co-founders and Managing Partners of Fifth Era, which manages Blockchain Coinvestors. Matthew is also Managing Partner at Keiretsu Capital, the most active early-stage tech investors in America, Chairman at CAH and Securitize (Europe), Vice Chairman at SFOX, and an advisor at Warburg Pincus. Matthew has been an advisor on growth and innovation-related issues for giants like Microsoft, Google, PayPal, Cisco, eBay, and HP. He is an expert in a broad range of industries.
My wife and I grew up in England, and we started our careers as management consultants with McKinsey & Company. We came to California more than 30 years ago to attend business school at Stanford and then had careers as senior partners at other big consulting firms including Kearney and in my case Monitor Group and Booz & Company. We were living in Silicon Valley, and our clients were big banks, payment companies, asset managers and also leading technology companies like Microsoft, HP, Cisco, Google, eBay and so on. Inevitably, since we were surrounded by new technologies and innovations we wanted to be more involved in the companies that were building at the digital world. Once we had money to invest about 20 years ago, we became active angels investors backing a few internet and fintech companies each year. So that was the beginning.
I eventually became a full-time angel investor, first with Band of Angels and Keiretsu Forum, and now with our own family office, Fifth Era. Alison and I also manage Blockchain Coinvestors, which is the leading blockchain venture fund of funds.
This is an interesting and complicated question to answer because we have several different ways we invest into early-stage technology. We are a direct investor, manage co-investment funds for Keiretsu Capital, and also are fund of funds investors through Blockchain Coinvestors.
Firstly, through our family office Fifth Era, we look at direct investments into companies, but very few each year. They tend to be ones where we know the founders already, and they will be internet, fintech, and blockchain focused.
Secondly, I am one of the three partners at Keiretsu Capital with Nathan McDonald and Randy Williams. Keiretsu is the most active early-stage tech investor in America, and we manage the funds for Keiretsu. That’s the second way we are getting investment exposure across a lot of early stage technology startups. Those startups could be any industry but our angel network will usually have backed them already.
Thirdly, we also manage Blockchain Coinvestors. In that case we give money to venture capitalists who are the best in the world in backing blockchain companies. They go out and make the direct investments.
So these are three different ways that we are investing in early stage tech companies. Between the three strategies, we are investing in perhaps 150 or more tech companies a year.
For our direct Fifth Era investments, we tend to stay in Silicon Valley.
Secondly, Keiretsu invests globally. We have 50 locations in North America, Europe, and Asia. There’s no particular geographic focus, it depends on where there’s an angel community in which Keiretsu has a successful chapter led by a president who is interested in supporting local tech startups.
Finally, for Blockchain Coinvestors we are seeking global coverage of the emerging blockchain unicorns in Asia, North America and Europe.
We are early-stage tech investors.
We believe that the failure rate and the risk are very high at the formation stage. We prefer to get involved in the lead up to the series A and the series A itself when the leading angel networks and the venture capitalists are beginning to look at the company. By this stage, the company has enough substance that you can get your head around whether you think it will be successful.
Investing later in the mid and late stage can be attractive but the valuations are tending to go up very fast in the spaces in which we invest. Our view is that we would sooner be highly diversified in the early stage than be paying very high valuations for a few late stage investments.
I don’t really keep a count but for Fifth Era, our family office, we only invest maybe three to five times a year directly into a company.
Secondly, Keiretsu backs about 200 companies a year. The 50 chapters of Keiretsu are probably seeing more than 10,000 opportunities every year, and there is a very comprehensive screening and filtering process that the 50 chapters are going through. It’s a very disciplined, organized process.
Finally, for Blockchain Coinvestors we’re investors in 10 to 15 leading blockchain venture capital firms, and between them, they’re probably investing in a hundred or more blockchain companies every year.
I think it’s best to give you the Keiretsu answer because, for most of the entrepreneurs who read this, their opportunity is most likely to get funded by the angel investors.
In America the angels back about 70,000 tech companies every year, the VCs are perhaps doing 10,000 rounds but they are only backing a couple of thousand new companies a year – the rest of their rounds are follow on investments. So for most entrepreneurs, they are going to get their capital from friends and family, and then from angel investors and perhaps family offices.
I’m going to answer your question from that vantage point. Most investors want an entrepreneur that can do a great job of answering most of a reasonably standard list of questions. They are:
There’s more, but these are broadly the things that we are looking for.
Then, of course, different investors have different technologies, industries, geographies, and stages that they are focused on. Also, some people are investing around some mission that they believe in. So for many angels and family offices it’s not just about making money.
Given this, every entrepreneur has to figure out not only what is the best focus for their company, but also how do they find the investors that they are going to resonate with. One of the most common mistakes we see is that an entrepreneur may not have done their homework to make sure they properly connect their opportunity with the priorities of the investors they are talking with.
Most of the companies that come to Keiretsu for funding are led by experienced serial entrepreneurs. They usually have had one or two startups in the past, and they understand the basics of creating a new technology company. They understand how to take their product to market, figuring out a product market fit, and how to build the company around this.
If the entrepreneurs reading this are first time entrepreneurs and have never launched a business before, then we think incubators and accelerators can be very helpful in training people to the basics of being a tech-entrepreneur.
The venture capitalists typically are backing people with that same profile of proven technology entrepreneurialism. Most of the big VCs will only back people that they know quite well.
In terms of the broader team you have to be a complete team. That is to say, whatever the opportunity you are going after, the team has to be able to explain how they are going to take care of all of the parts. As an example, if it’s a technology business being offered globally to a broad audience, does the team have people that no only understand the technology, but also understand the various audiences and how to operate a globally. You have to convince audiences that you have a great team, but also a complete team given the opportunity you are going after.
So we care about the three questions: the capability of the entrepreneur, the completeness of the team, and if it is the right team for the opportunity that they are describing.
That’s not correct for Keiretsu. In the case of Keiretsu, any entrepreneur can go to www.keiretsuforum.com and look up the chapter that is closest to them. So, if you’re in Boston or Singapore, or Istanbul, you can find out the contact details of your local chapter and you can reach out to the president or the entrepreneur director and tell them, “I’d like to come and meet you, and maybe visit your chapter and learn about angel investing.”
We do have a good number of entrepreneurs that come that way, but meanwhile, we also have several thousands of angel members around the world, and they will all be out meeting companies and getting pitches and they will bring the best ones to the Keiretsu angel network.
The latter is the majority: seventy percent of the deals that come to Keiretsu have been introduced by a member.
Answering for Keiretsu, there is a Keiretsu due diligence e-book that any entrepreneur can download at the Apple App Store.
Keiretsu due diligence is pretty comprehensive. Since we are the world’s leading angel network we take due diligence very seriously. Most of the companies that are presenting to us, as I mentioned before, are approaching the bridge into series A or series A, so they are the more established companies that are led by teams of experienced people and they are prepared to go through comprehensive due diligence. I think VCs also expect that level of due diligence. So, that’s one resource. People reading this can go online and download that book.
Now it is true that a lot of companies can never get out of due diligence. They get stuck for some reason. It’s very rare for professional angel organizations to make quick decisions. This isn’t like an ICO offering where people read it and press a button and send some money without doing due diligence. Keiretsu Angel Investing has a lot of due diligence being done.
The most successful entrepreneurs will have their due diligence materials created before they even present for funding.
In the case of Keiretsu, the members are typically writing checks between $25,000 and $100,000 dollars. And maybe 10 or 15 of them are investing in each of the companies that get backing. I don’t have the latest information, but I believe that the average round of Keiretsu last year was perhaps $600,000. The largest round we’ve done in recent year was about $10 million dollars. But that was a very unique situation, a healthcare company with a mission and a cause that the members wanted to support.
About 50% of the companies that present at Keiretsu will end up raising money and about 50% of them will drop out during due diligence. So those are the metrics.
If you look at it in a different way, in the bridge into the series A round companies are typically raising between $1 and 3 million. So you can see, Keiretsu is probably providing a third of the money that they need, and they still have to raise capital from other angel groups and from their friends and family and family offices. It’s very rare that Keiretsu will provide all of the capital.
The principal red flags – the ones that will kill the opportunity immediately – are if there’s anything negative in the background of the entrepreneurs. If we find out things about the entrepreneur that the entrepreneur hasn’t shared when we do background checks on them that always kills the deal straightaway. Another is if the entrepreneur has tried to hide information or has given incorrect information on purpose. That will also kill the deal immediately. Trust is extremely important between the investor and the entrepreneur, and these things are red flags.
Other red flags would be if the pre-existing investors have hidden important information, and so the new investors feel that they are going to be taken advantage of.
Then sometimes some sort of a legal issue – perhaps there’s a case when someone is saying that the software has been stolen or pirated – can kill the deal immediately.
The other issues which come up in due diligence are all of the issues I’ve mentioned at the beginning; size of the market, quality of the product, ability to compete, and make money and so on. All of those things are things that we discuss, and it is possible that they can prove to be reasons why people might not invest. But it’s more subjective, and it’s more up to discussion.
The true red flags that kill the deal straightaway are bad news about the entrepreneur, the entrepreneurs lying or hiding information, other investors not being straight, obviously, legal issues around the company.
Obviously, this pandemic is a terrible thing, and a lot of people are in distress, and the economy is hurting, and business is hurting, and people are dying, so it’s a terrible, terrible thing for us to have to live through. We hope that is resolves soon, but fear that the worst is still to come.
However, Alison and I are Internet, fintech, and blockchain investors. We are working very hard on supporting teams that are transitioning the world to a digital world, and we’re only about halfway there.
I think that this pandemic is accelerating the adoption curves of many of the underlying use cases and behaviors and technologies that are necessary to enable a digital world. As examples, the global adoption of ecommerce, of digital payments, of virtual health, education, and entertainment, and the use of digital communications technologies have all greatly accelerated since this crisis began.
We already had early adopters using these technologies, but in just a few weeks, the laggards have had to come onboard as well. I think this is a profound matter. The world was just greatly accelerated in its transition towards a digital future.
I think for the technology entrepreneurs who read this they are going to find that this was very beneficial to their businesses if they can get through the inevitable funding crisis.
Alison and I are very fortunate that we are able to choose how we spend our time. In my case, I love being involved in technology and innovation, that’s what I want to do. I love the ambition and the optimism of the entrepreneurs. I know that it’s very painful when the startups fail and when I lose money, so it’s not all a good news story. But most people are trying to work very hard to change the world in positive ways, at least the people we get involved with. I find that very exciting.
I think Alison would agree. She likes to spend her time working with people that she enjoys working with. In teams that have interesting and exciting missions. Sometimes these are big public companies where she sits on the board, and sometimes it’s new emerging startups.
So yes, we feel very fortunate to be able to do what we do today. It took us a lot of time to get here, and we’re enjoying what we’re doing.