Rating of Unicorn Universities
04 Dec, 2020
Robert Siegel is a Partner at XSeed Capital and a Venture Partner at Piva. He is also a lecturer at the Stanford Graduate School of Business. Prior to joining XSeed, he was General Manager of the Video and Software Solutions division for GE Security, Executive Vice President of Pixim, Inc., Co-Founder & Chief Executive Officer of Weave Innovations Inc. He also served in various management roles at Intel Corporation, including an executive position in their Corporate Business Development division.
My first experience to venture capital was as an entrepreneur. I was working for a software company, and we raised venture capital money in the early 90s. One of our investors was a gentleman by the name of Bruce Dunlevie, one of the founders of Benchmark. Bruce was an incredibly accomplished and impressive person, and I saw how as an investor he was critical in helping our organization succeed. I looked at Bruce and admired him. That was my first exposure to venture capital. When I finished my graduate work at Stanford, I went to work for Intel Corporation, and I worked in the group that was the predecessor to Intel Capital. We made investments, but it was very much in the line of not just a corporate venture capital group, but we also did a lot of strategy work for the organization. So, my second exposure was as an investor in Intel – it was in the 90s when Intel was the Facebook or Google of the day. I met almost everybody in the venture capital community in the Bay Area. Then I became an operator for a little over a decade in a variety of roles – a couple of startups, and I ran a division of GE. When I left GE, I got a call from a friend: the firm XSeed Capital had just been started. My now business partner, Michael, was the founder, but he was looking for a partner, and my profile was very similar to what he was looking for. I was 39 years old, I had thought that my time in venture was done, and I was going to be an operator for the rest of my professional career. I ended up meeting Michael and we just got along really well. At that time (it was 2007) seed investing was not a thing, and I really liked what XSeed was doing. And Michael had a thesis that there will be opportunities to get disproportionate returns by going in at the Seed stage and having enough money that you can keep writing checks, so you wouldn’t be washed out through larger rounds. I found it to be a very entrepreneurial idea at that time and it kind of mixed a lot of the things that I had done in my background, doing something with an entrepreneurial bent: I had been an investor, I’d been involved in around the venture community at that point for about 15 to 20 years. And it was really kind of more by accident: I’d like to tell you that it was by design, but in reality, an opportunity opened up at the moment of time and when the opportunity presented itself, I took it. In XSeed we’ve been investing at the early seed stage for almost 14 years. Our first fund was a little over $50M in size which at that time was huge for a Seed fund. We would look for companies with strong technical differentiation and we would work very hard with the entrepreneurs to support their efforts as they grow from that seed to the Series A stage. We raised the second fund in 2012 which was about $60M in size. That fund was focused entirely on traditional computer science and IT. We’ve made the first close on our third fund a few years ago. It’s been a great run! We really enjoyed working with entrepreneurs at the earlier stages. The business has changed drastically since we first started our endeavors. Now so much money is coming to venture and Seed-stage investing evolved so much over time. The very-very large funds are raising so much capital that they are able to verticalize: they have a growth fund, an early stage, and a seed fund. Because these VC companies are that big, they might be able to write $5M checks at the Seed stage. The dynamics of the business are changing right now.
We invest in companies that are doing some very progressive things. In 2008 or 2009 we invested in an energy company that was working with seaweed as a potential fuel source. We also invested in several Life Science companies, they’re doing quite well. One that was a wound closure device that can reduce time spent at hospitals. Generally, our fund’s investing focus has been much more on the computer science and tech side, and our most successful companies are usually applying artificial intelligence and machine learning for specific verticals. Lex Machina was one of our investments, they apply natural language processing to the legal space. We got a very exciting company now called Lilt which applies natural language processing (this came out of Chris Manning’s lab at Stanford) applied to the translation of languages. We’ve done some staff in synthetic biology that Ryan T. Gill started, called Artisan Bio, which uses AI and machine learning for therapeutic development and unique cell design. I think these are our more exotic investments.
I’m going to put it in the neighborhood of 500, and that’s actual decks that I, as an individual, get from people I know, students, things that will be sent to me on a recommendation. About 20 a week.
Probably, about 30. If I make 2 or 3 investment in a year, it is good.
For me, it’s usually based on recommendations. At Stanford, I teach 5 different courses, and the startup community is very active around Stanford, so I have a large student base that provides a network. I’ve been teaching for many years, many of my students have been out for a long time and graduated, so they’re starting their entrepreneurial journey. For me personally that’s a lot of my network, and then my students recommend their friends. That becomes a key source of deal flow for me.
I think you have to look at the context of Silicon Valley. Silicon Valley has been active for 7 decades in startups. Let’s start with the history of Stanford relationships with it, that goes back to the founding of Hewlett-Packard and professor Terman funding Bill Hewlett and David Packard. That set up a culture where the University developed an attitude of, that commercialization of invention and technology is an acceptable thing to do, that deep science can lead to innovation and products and organizations. That developed the culture over decades which created a surrounding infrastructure of venture capital, accounting, lawyers. You have in the Bay Area many top academic research institutions that attract the best and the brightest young minds from all over the world – Stanford, University of California, Berkeley, University of California San Francisco, San Francisco State, San Jose State, Santa Clara University. You have a strong concentration of achievement and academia, and an influx of young people from a global basis – and immigration is a very important part of that. Then you have in favorable government policies, like tax incentives for venture capital, that make it an attractive place to take risks. And so you get a virtual circle that is developed in the Bay area and Stanford is in the center of it.
I look at a few things. The first is: does the business have an ability to differentiate itself from the competition and grow to a size within a time frame of relevance that can yield venture backable returns? Of 10 investments VCs make, 6 go bankrupt, with 3 of them you make 1x to 4x, and you need that 10th one to deliver 10-20x return. And you have to believe, when you write that first check, that all the companies you invest in have the potential to be a 10x to 20x. I see a lot of good businesses, but they are not going to achieve the size and scale within the time frame of a venture fund. We see very few bad ideas, the question is do we see ideas that are the ones that are venture capital should fund and focus on. We look for opportunities that can get big and we look for entrepreneurs that fit our criteria. Number 1: They can generate excitement – for us, for customers, for their employees. Number 2: We look for entrepreneurs who are problem solvers. They know how to work through the hard times. Number 3: We look for the entrepreneurs that I call “the truth seekers”: the people who have a fierce desire to get it right – not to be right. Number 4: We look for entrepreneurs who are a little bit impatient. You want an entrepreneur who’s a little broken, but not broken a lot.
There’s nothing about the pitch that interests me – it’s about the entrepreneur and the opportunity. That’s what is interesting. When I come in, there’s nothing about the slide deck, nothing about these things. I want an entrepreneur who wants to raise the money, not just have a conversation, because having a conversation is not helpful. I want to understand what her or his vision is, how they believe they’re going to be able to grow a big business, and what they’re like as individuals. At each meeting, I’m trying to just get to know the entrepreneur and evaluate the opportunity.
Through XSeed most of the work that I do is traditional Computer Science, Artificial Intelligence, and things like that. Piva, where I’m a venture partner, looks at Energy at large – CleanTech, non-CleanTech, they look at Industry 4.0, and they also look at Material Science. Between the two funds, it’s a pretty broad filter.
ownership level is going to be with the investment, how much reserves do you have to have for your winners. In XSeed we are always the first institutional money, so usually, we are doing Seed or pre-Seed and will never go in at series A as a start. We might participate in follow-on rounds, but only for our pre-seed or seed companies. Piva generally invests at Series B level, that’s their initial go-in point. That’s based upon the strategy of each organization.
Obviously, there is a large concentration in the United States. If you are abroad, we like to have a professional investor on the ground, helping us, complimenting us in the ways we can’t. For example, we did a company called Zooz, acquired by PayU (a part of Naspers). It was based in Israel. We knew we can help them with strategy and technology and US customers, so we were looking for local partners who can meet with the team in person when a problem arises. And we can invest globally, but when we invest outside the Bay Area, we want to have local partners.
It depends on the company. For XSeed it can be, on average, about 2 months or even much faster. That includes first meeting, second meeting, due diligence, agree on terms, and finish the paperwork. We’ve done deals as quickly as 2 weeks. And I would say it’s about the same for Piva.
You always want to look for that 10x to 20x acts, that’s critical.
Our target ownership share tends to be 10% to 15%.
Absolutely yes. You prefer a team because you don’t want a single point of failure, and it takes a team to win, not just an individual. But we have funded single founders, that’s not an issue for us.
Everybody should tell you – and the truth is – that you want to work with Steve Jobs because Steve Jobs was the person who built a company that became that big. That helps you to do your job, which is to deliver investment returns. Steve Jobs made that happen. You might be friends with Steve Wozniak and you might like Steve Wozniak more, but the entrepreneur you want to be behind is Steve Jobs.
An entrepreneur who doesn’t listen. An entrepreneur who doesn’t care about the needs of others. As an investor, my job is to make money for my investors – we are very transparent about that, there is no secret in what my job is. I don’t want to run the company – it’s an entrepreneur’s company. My question is does the entrepreneur care about her or his employees, care about her or his investors? My red flag is when somebody just wants to be left alone. Getting back to that people question, people who want get it right vs be right. I want a great entrepreneur to run the company and I don’t want them to do what I say, but I want an entrepreneur who listens to people to get to the right answers.
All the time. Extreme one: it was an Israeli company that got bought by EMC for a lot of money – a huge opportunity that we missed. The reason we said “No” was this was in 2008 – early 2009, when the financial world was melting down. And the company was really far away from us, it was in Israel. We were a new fund, we were just figuring this out. We were scared that we wouldn’t be able to support them because they were 6000 miles away. The whole world was melting down, so we walked away from the deal. That a huge loss, a dumb mistake that I made.
I don’t take my personal attractions to a particular industry based upon my personal choices into account at all when it comes to investing. As an investor, my job is to invest. I look at every industry in terms of can I get returns for my investors of what they expect? If the answer is “Yes,” I explore it. I find many industries interesting, that’s part of being at Stanford: I study Industries from all over the world of all types, it’s intellectually interesting. The filter that I use when I invest is will it bring venture backable returns in a time frame of relevance.
As a personal fantasy, absolutely. But not as a venture capitalist.
I think that the COVID-19 has become a great test to understand how entrepreneurs have weathered and how they thought about things, do they understand quickly that the world had changed fundamentally and what do they do about it, or are they still trying to draw with the old playbook not understanding that the world is very different and much more vulnerable right now. In addition, we’ve learned how to do investing when you cannot meet entrepreneurs as often as we used to. You learn to not only use Zoom as a tool but also you do much more reference checking because you have to.
Both. If you’re in the Hospitality space, you’re going to struggle. If you’re in Collaboration and Communication, you’re going to do well.
I’m not a believer in books that are the flavor of the month. I’m more of a believer in books that can teach you over time, that survived time. Andy Grove wrote a couple of books, like High Output Management and Only the Paranoid Survive, that every entrepreneur should read. Geoffrey Moore’s’ book Crossing the Chasm. Clay Christensen’s The Innovator’s Dilemma. Those are classics every business person should read. There are books with a far more academic focus, that’s not really what entrepreneurs want. Sometimes I find someone’s personal journey really interesting, like Phil Knight’ book Shoe Dog – very well written. These books are classic that everyone can benefit from.
Everything starts as a startup. In no particular order: Ford Motor Company, Google, and Microsoft.
I reject this question! Here’s why: I think, it’s a false choice, that’s not necessary. The world today allows us to do multiple things, and this the nature of these 2 jobs – they are positively reinforcing. Being around Stanford helps both my deal flow, but also I have access to world leaders who come to my classes and later become strategic relationships from many of my portfolio. I don’t think I could have an operating role as my second job, because when you have hundreds or thousands of people reporting to you, it’s a completely different story. Also, I get different things out of each job. As an investor, I learn where technology is heading toward and get in touch with the people on the ground doing interesting things. As a lecturer, I get to do research, I get time with students, and that’s a very emotionally rewarding thing to do. So, you know, you’re asking me which of my children do I love more – I love them all!
The single most important one is luck. And everybody who tells you otherwise is lying to you and they’re lying to themselves. Everybody in the business is brilliant, those are the smartest people you’ve ever met, everybody went to a great University and everybody works really really hard. As a great investor, if you work hard, you can help an entrepreneur to turn 1x into 2.5x – by coaching the CEO, helping them make good decisions. You can do that – I’ve done that. I helped entrepreneurs with acquisition discussions when we’ve been able to increase the outcome. You cannot help an entrepreneur to turn 2x into 20x return – only an entrepreneur can do that. Absolutely positively: luck is the most important variable. You still have to work hard: you still have to hustle, you still have to have a good deal flow, you have to make good choices, still, luck is the most important variable that matters, and everyone else’s lying to themselves if they say otherwise.
The card game. Poker.
It’s harder than you think. Everyone tells you will reach your highest highs and your lowest lows, but nobody tells you that those are 20 minutes apart. You need to keep your emotional state as steady as you can. Your passion, which is your greatest strength, can also be your greatest weakness. So the first piece of advice is: You’ve got to think long term and try to keep your emotions in check. Second: Conduct yourself with grace and dignity. Everybody’s watching you – your employees, your customers, your family, and you’re under extreme stress. Do what you can to take the high road. Third: All you can do is your best. If you work for 3-4-5 years and it doesn’t work out, but you’ve built a great product, you’re proud of what you did, you work with great people, it’s not the end of the world, if it doesn’t work out – you’ll get up and you’ll do it again.
For football it’s Liverpool. “You’ll Never Walk Alone” is a good mantra. As for hockey, I’m a San Jose Sharks fan. In our house, when the Olympics all around, I’m always rooting for team USA, and my wife, who is from Canada, is always rooting for Canada. But otherwise, we are local team fans and run for the San Jose Sharks.