Peter Harris (University Growth Fund): When you do the hard things, it’s very impressive because VCs know that those things are hard and it will give them more conviction to back you.

Peter Harris is Founding Partner at University Growth Fund. He assists in the deal sourcing, due diligence, and portfolio management of the fund. He also spends much of his time recruiting, training, and mentoring students in the program. Prior to UGF, he was a principal with University Venture Fund where he participated in funding several companies including Instructure, Lineagen, and Workfront. He has also worked as an international business consultant, helping launch over 10 microfranchises around the world. He has been a loan committee member for the IRC Refugee Loan Fund and a frequent guest lecturer at several local universities.

How it all started? How did you decide to enter the venture investment business?

Growing up, I really wanted to be an engineer, like my dad. When I was at the high school, he left engineering work at Lockheed Martin and started doing some real estate investing. When it happened, I could not change my whole mindset from being an engineer to maybe doing something more in business. I worked closely with him and my mum’s who were doing real estate investing in upstate New York and got the bug for investing. When I went to school, I thought that’s a really great opportunity to be an entrepreneur and start my own business. At the time when I was in school, I was working really hard on launching a business that was similar to Redbox. Right about the same time Redbox announced plans to launch in Utah I was living in a pilot market, they had a hundred million bucks in the financing, etc., so I decided that business didn’t make sense and shelved it. At the same time, a friend of mine approached me and said, “I know you really like entrepreneurship and you got an investing background. I think you should check out this thing come to University Venture Fund – it seems like something you’ll really enjoy.” I checked it out, it did look super interesting, I applied, got in. University Venture Fund was at the time $18M student-run fund for students from Utah University, Brigham Young University, Westminster College, and Wharton School of Business, and the students were really empowered to do the due diligence on investment opportunities. That’s how I cut my teeth on venture deals. I did that for years as a student. Then the team that started the Fund left to pursue other things and brought a new guy that can run the Fund. He and I worked really closely to rebound the entire fund operations. When I graduated, he offered me a position to stay with the fund and help him run it, doing all things out I was already doing – training students, bringing deals, doing the due diligence, reporting to investors. We worked together for another 6 years. When that fund came to the end of its life, the board decided that they really wanted the next one to be about impact investing. My partner and I liked impact investing but we had built a really strong track record around more technology-related investing. On top of that, students that we are working with were interested in continuing to do tech investing. And ultimately we are all agreed to split. University Venture Fund still exists today, it’s a part of the University of Utah and they do impact investing. Tom, my business partner now, and I left and made University Growth Fund back in 2014/2015 to continue the mission that we had been working on at University Venture Fund. That’s how I ended up here today.

What surprised or impressed you the most when you started working in venture capital? 

The thing that continues to be interesting to me and has definitely been surprising when I first started is that talking about due diligence of a company people think about finances or market or team background, etc., etc. All these are very important. But there is a concept I call “deal dynamics” that is often missed, all the things that are in around how a deal comes together in venture capital: who is leading the round, are there insiders participating, are they doing a pro-rata or above the pro rata or under, are founders selling shares or are they getting massively diluted there, how much ownership do they have at the end of the day, what kind of compensation are they getting relatively to the ownership vs how much has been raised. All these things, I can go on and on and on. These aspects of a deal have a very meaningful impact on the long-term success of a company. That’s something I never really appreciated. When I first got in, the first investment committee meeting that I went to, we brought in some really outstanding venture capitalists from other funds, and students had to pitch them a deal they’ve been working on for months. And this investment committee tore apart their entire analysis, asking tough questions. And often those questions were centered around the dynamics of the deal. I think part of the reason for that is because in VC there is a massive asymmetry in information. You can do a lot of analysis, you can meet with the management team, still, there are so many things you don’t know, and these deal dynamics send signals about the quality of information you can see and dig into if you can read them correctly.

How did the ecosystem change over time? 

When I started working in the VC back in 2007, there was a tailwind effect of having a lot of VC funds start back in the late 90s – early 2000s and then get hit really hard with Dotcom Bubble. You had a lot of these zombie funds out there and you had a few really good ones. It was still a very sleepy industry compared to where it is today. The majority of those funds weren’t going to be able to raise another fund. It was an interesting time. It was also 2007 and right during the financial crisis, and a lot of funds were struggling. But that also created some really compelling opportunities, with companies like Airbnb. It was the time of booming adoption of the internet with many online companies starting with not as many funds pursuing those deals. So we’ve gone from a handful of really good funds scattered across the US to today when it’s tonnes of money in the venture, in private equity funds, hedge funds, mutual funds, corporate investment, crowdfunding, etc., more money than ever before. I think it’s great, but on the other hand, it also makes it a little bit more challenging for a business, because valuations are rising and there’s a lot more competition for the very best deals. Technology has made it easier than ever to start a company, so you’re seeing more new companies and new ideas come to market than ever before. 

What is your strategic vision for the next five years?

Barring any major economic, you’re going to see some interesting companies continue to grow and succeed, driven by the amount of capital being put into the system. And technology adoption will occur in two directions. First, more and more countries globally are adopting technology, improving infrastructure, and coming online. That opens up massive new markets as well as a new entrance. Overall, the global economy will continue to grow, being a huge potential market for new companies, because the internet lowers the borders. The other way you could see in the last year was when even the industrialized players like the US increased technology adoption. Our lives become more and more digital. Both of those trends create insane market opportunities for companies and that’s why capital goes into these areas.

What long-term consequences of COVID do you see?

It’s been a great accelerator. A few companies within our portfolio struggled because of COVID. The vast majority actually tailwinded and well performed, because most of our portfolio is technology-based. My hope is that COVID won’t be a long-term driver and my hope is that we can get through this relatively quickly and get back to business. I don’t think COVID will have a long-term impact on our industry. 

What are the most interesting companies in your portfolio and why did you choose them? 

It’s like choosing among my children, but I’ll tell you what companies I really like talking about. We made an investment in Carta several years ago. What I like about Carta is the grand plan they have and their multi-product approach to achieve it. When we invested, they only did capital management. They built a very good business. The idea was to start with cap table management and we will do what we can on that part of the market not because we think that in itself is a great business but because we think that data is incredibly valuable and creates a compelling foundation for what we’re going to do. They did that and then they took all this cap table data and launched services for finance. For example, although we are an investor in Carta, we’re also their customers. We use them on the fund admin side. And it’s great because a bunch of our portfolio companies is also customers of Carta and data flows nicely between the two platforms and allows something that required an expensive CFO position and reduces that admin expense. They’ve done that for funds, for companies, they’ve done it for LPs, then – for employees. And now you have accounts looking pretty much like brokerage accounts and you’ve got the buyers of stock, sellers of a stock all-in-one platform where buyers and sellers of private stock can facilitate trades on a single platform. You can open up all kinds of interesting ways to create liquidity for the startups that are staying private longer and longer and longer than they had before and have the same pressure from employees to get liquidity. There is a lot of speculations that Airbnb probably won’t have gone public at the time they did if it were not for a large number of employees and other stakeholders eager to get liquidity on the shares. We think that opens up this incredibly large market that blurs the line between what does private and public mean and also, hopefully, democratizes a little bit of access to this asset class.

What was the most unusual, or even exotic startup you ever supported? 

We don’t do a lot of crazy technologies investments. I think, one of the companies that we backed is a little bit different. It’s called Blast and it was started by the team that launched Acorns. They created an application and they will pay you to play video games. They have a list of the video games on your phone that you can download, and if you make it to a certain level, they put dollars into high-yield savings account on your behalf. The idea is if you have all these kids sitting around playing video games on their phones all the time, is there a way to monetize that on their behalf and create a savings program similar to what they did with micro-investments. 

What is the size of your current fund? 

We currently manage about $70M. 

What percentage of it is reserved for follow-up rounds?

We reserve probably about 20 to 30% of our capital. We don’t reserve as much as other funds. We invest as early as Series A, when a company is doing $1-3M in revenue all the way up to a company at pre-IPO. Our investment depends on where the company is within that range. At the earlier stage, we might write a smaller check but we’ll reserve 3x that check. If we’re doing a pre-IPO, we just put all the money we want to invest and won’t reserve anything.

There are many venture funds out there today. How do you differentiate yourself for limited partners, and for entrepreneurs?

For us, differentiating is all about entrepreneurs, because if we get access to great deals, that will be enough for LPs to get excited. I guess we do have some unique things about us on LP side as well. On the entrepreneurs’ side, we focus on providing very rich educational opportunities for entrepreneurs: we put a lot of time into training them, supporting them. We have about 50 of them today across 13 universities. It’s a lot of work, but I can pretty much guarantee anybody that they won’t get a better experience from an investing perspective anywhere else, based on the level of deals we’re working on, the level of training and support, and the level of autonomy you have as a student – all of those things. When we talk to entrepreneurs about allowing us to invest in their round, they know it will have a direct impact, giving them additional experience. And on the other, LP, side, a lot of our money comes from large banks, family offices, and individuals. As for family offices and private investors, I think they are impressed primarily by our track and quality of deals we have and secondary they want to support students. Bankside we help them with regulatory requirements they have around investing and the fact that we’re impacting students plays really nicely into receiving that regulatory credit as well as the underlying investments that we make. So, it is a win-win-win situation for everybody.

How many startup projects do you review per year?

We probably review about 100. I know that is much lower than the vast majority of venture funds out there. Out of this 100, we will invest in 10, and that is a high rate. The reason for that is we won’t even look at the deal unless that already has a strong institutional investor. It cuts out a lot of deals that other VCs would look at.

At what stage do you prefer to enter?

As its name suggests, our fund focuses on the growth stage, for the companies that have tens of millions in revenue – Series B, C, D. We do about of a quarter in Series A deals and about a quarter in pre-IPO. 

How much do you invest in initial checks and over the life of a company?

Our goal is to deploy about $1-2M a deal. At earlier stages that might be $500K at the entry point and then we reserve another $1M for follow-up. If it’s a pre-IPO, we might just write a $1-2M check. 

Geography of your interest?

Primarily, in the US – we have offices in California and Utah. We have made a couple of Investments outside of the US, but it’s very unique and very rare. Incidentally, both are from Sweden – Spotify, and Klarna. But that’s unique for us.

What verticals or industries do you invest in?

We are pretty opportunistic and look at various things. We don’t invest in Life Science and everything that has a huge regulatory hurdle through FDA or likes. We don’t do moon-shot science: if it ends up working, it’s going to change the world, but it’s just outside of our level of expertise and ability. And we don’t do anything Seed. What we really are trying to avoid are deals that are very binary – either massive home runs or total loss. Recently we spent a lot of time investing in FinTech, specifically in InsureTech. We’ve done a decent amount of Consumer Products investing, like Consumer Tech, and in Enterprise Software. A lot of it is related to things that students can wrap their brains around quickly, dig in, and do good research. 

Can you name industries you really like, yet will never invest in?

I personally love Virtual Reality and Augmented Reality. We’re getting working better with Oculus Quest 2. I think there are some huge opportunities that could be unlocked there. I can’t say that I would never invest there but we do look at many opportunities and we’ve never been able to get there; there is still a lot to be figured out in this industry. I think it is fascinating, I love my virtual reality headset and use it all the time for all kinds of things. Another one that, maybe, over time we will get involved is Cryptocurrencies and Blockchain technology. It’s coming and it’s going to be more and more integrated into both behind-the-scenes and in forefront of our daily lives. Today, again, we’ve looked at a lot of things and passed, because it’s so hard to tell the perspective in that industry.

What a startup should have to propose to catch your attention? 

We don’t get many cold emails, so I’m looking for traction. If you can show me that you’ve got some real customers giving you money to solve their pain points with your solution then I’ve going to be interested. 

What makes a good pitch vs a bad pitch?

It boils down to an entrepreneur’s ability to do 3 things: help me as an investor feel the pain of the consumer: understand how their solution is the obvious no-brainer solution of the future and convince me that they’re the ones who actually be able to make it happen. If you can do those 3 things, you’ll be successful in bringing investors on board. 

Before starting a round, what is the way for startup founders to estimate their company’s realistic valuation and how much money they need to rise?

Your initial baseline is going to be to look at other companies that are similarly staged with similar people, similar traction, and market size to see how much they raise and their valuation. At Series A most founders are going to give up somewhere between 15% to 25% of their company, if someone raises $10M, this company probably has a valuation of around $40M going into it. That’s a bassline that gives you an idea of what is the market like right now. You can move up and down based on the size of the market you’re going after, based on how much traction you have, based on the growth rate of that traction, based on the team that you have. People that operate in a really really big market and chase something really big and really hard get a bigger valuation, because it’s again a binary situation where it can be a huge win. Your ability to fundraise has also impacted valuation: some people are just really good fundraisers. It’s also important how much do you need to raise, it is also company-specific. 

If during the pitch or diligence process you see that there is no market for a product, especially if that market doesn’t exist yet in a chosen industry, but the product is interesting and may be used somewhere else – do you help them pivot to different markets, where that would be a fit?

We might give them feedback because we want them the best. Generally, in my experience, technologies and products looking for a market usually fail, and it doesn’t matter how cool the product is. The best products are those where the founders are very focused on solving some pain points of their customer base. Even if the product is not most flashy, if it solves it, that’s all that people really care about.

What qualities you are looking for in founding teams? 

I look for people that are a little bit irrational, but very smart and know something special about the industry they’re in, and are driven to fix it. I’m looking for somebody who has unique experience or insight into a problem and how to solve it – they had earned that through experience and knowledge and study. Also, this person has to have an irrational belief that he or she is the right person to fix it. It is irrational because the likelihood of success is pretty low, especially in tech when you look at the numbers. Yet you need somebody ready to put everything else in their life aside and focus on building something in a very risky environment. Of course, I look for people that have the qualities to be successful. For example, if the company will need to raise a lot of money over time to be successful, they need to have people who are good at fundraising onboard. Alternatively, it might be something totally different: it might be the ability to build incredible products, land very large partnerships, or navigate complex regulatory environments. We access what might it be for a company to be successful, so we can decide does a team has those abilities or the ability to easily acquire them.

Who you would prefer to work with, Steve Jobs or Steve Wozniak?

On a day-to-day basis, I’d rather work with Wozniak, but I’d rather invest in Jobs because someone like him would be a lot more driven and do everything they can to achieve success. Entrepreneurs can be challenging and tough, it’s risky; things fall apart all the time. You need somebody that has that ability to grind through all of it. But I don’t think you have to choose between the two or become Steve Jobs to achieve success. We’ve backed up some of the most incredible individuals, who are the kindest, nicest people, incredible managers while being incredibly ambitious and driven. It’s kind of a loser’s choice to say it’s either one or the other. I think you can be both. 

Investors prefer to work with teams. Have you ever supported a one-person startup?

No, but not so much because we’re opposed to backing solo entrepreneurs, but we just don’t do Seed investing, and by the time an entrepreneur gets to Series A round they have to have a team around them. 

What is your process of working with startups, once you invested in a company?

We don’t take board seats, but we are trying to be helpful. That could be everything from reaching out on a frequent basis to touching the face with the company and seeing if there are projects where we can be helpful to giving advice and guidance, making introductions. We try to be friendly helpful investors as much as we can rather than those trying to get inside the business and control things. 

What are the most common mistakes startups make? 

The biggest one is scaling prematurely before achieving a good product-market fit. We’ve seen the number of such businesses, and those can be really challenging. In the current environment, you can get a little bit of a buy on that because of so much cash is flowing into the system. We’ve seen companies that have got 100 people, that didn’t find product-market fit and burned capital like crazy because they want to look like they’re big deal – but they’re not yet. Those businesses end up really struggling because they need more cash to meet payroll and they cannot raise money based on traction they have.

How much runway should a startup have to feel safe?

You should start fundraising no later than when you have at least 6 months in the bank.

Have you ever rejected a startup and then regret it? 

Sure! Instead of giving a specific example, I’ll say that one of the challenges that we have, as a student-run fund, is we get access to some really interesting opportunities. The flip side is if we turn down an entrepreneur, it’s a pretty big flop on ego when a bunch of students doesn’t want to invest in your project. One thing is if that’s a co-ed, another when it’s a 19-year-old from the University of Utah to tell you that it’s not a fit. Sometimes there had been companies that we thought were super interesting, but it was just a little too early for us and we wanted to see them prove something, so we wanted to wait till the next rounds and an entrepreneur didn’t give us another chance to come back. Other times I didn’t pursue the deal very aggressively because I don’t see that it would be successful or there were some pieces that I missed – maybe the solution seemed more like a feature rather than a product or I didn’t appreciate the fact that it doesn’t matter what the product was because the company was really really good at moving product that’s selling and that was the real value that the company is bringing. 

Can you name the three most breakthrough startups in history?

I’m a huge fan of Elon Musk. Both Tesla and SpaceX are incredible businesses that will have an incredible impact for decades, if not centuries. Even beyond what they do as a business. Testa forced the hand of every automaker in the world to play the game of building EVs. Even 10 years ago people thought it was a joke. Granted that I’m an investor in Airbnb, I’m pretty biased, but I think Airbnb has a huge potential over the long run to continue to grow, to open up new markets and new opportunities. Warren Buffett talks a lot about investing in businesses that are going to be around 100 years from now. I see businesses like Airbnb, Uber and others, that are marketplace driven, that solve important pain points, whether it’s a roof over your head or getting from point a to point, that always be a problem. It’s so powerful that I have a hard time seeing these companies and their solutions go away over time. I think the whole movement of marketplaces will continue and be more and more extensive. 

The greatest startup failure?

This company hasn’t fully finally failed, but I have a hard time seeing how it ultimately can be successful. It’s Nikola. We looked at that deal because the company started in Utah and we looked at it back in the day when it was like a billion-dollar valuation. We ultimately passed. We probably, from a pure return standpoint, should do it because we would have made 20x. Nonetheless, that is another interesting example of a company that raised a huge amount of money while they had no real technology. Like Theranos.

Venture capital is a long-term game. What keeps you going on? 

What I’ve learned about myself over time is that I really like 3 things: I like building things, I like helping people, and I really love to learn. What I do at University Growth Fund, and there’s really a no better place for me to be, I’m building this business as a venture fund that scratches that entrepreneurial itch that I have. I’m working with students and helping them achieve great things and working with entrepreneurs and helping them achieve great things, so that part of what I do is really fulfilling. And I just love to learn, and venture capital is such a dynamic industry. It is a long long-term game and you can place your bets and for a long time you don’t know whether or not you’re right, but the flip side is that it’s incredibly fast-paced at the same time because you have to get up the learning curve on so many new technologies, business models, keep all approaches, markets, and it forces you to learn constantly, which I love.

What qualities do you think are important to be a good VC?

In order to be a really good venture capitalist, I think, you need to be able to do 3 things really well. Two of these things you need to do really really well, world-class well. You have to be able to fundraise, convince investors to give you money based on nothing more than your promise you will do your best to invest this money. You have to be able to find and get access to really great investment opportunities. And you have to be good at knowing when to invest and when not to invest. Most of the time people focus on that last one and neglect the other two, but if you have any 2 of those 3 qualities, you will be a very successful VC. 

Is VC business chess, checkers, backgammon, go, card games?

I don’t think that investing is a game like chess or checkers. One of the things that makes VC interesting is that you have to think strategically about what you’re doing, where is the future, and where things are headed, then you have to take a big risk. But it’s a calculated risk and the potential return makes up for the risk of loss. There are probably board games out there with all those things. My guess (and I am a board game nerd) is that it’s probably more of The Settlers of Catan.

Your dream job when a child?

I was fascinated with spy movies and spy books and wanted to be something like that. 

Your three pieces of advice to founders?

My advice to founders that are thinking about fundraising. One: Wait as long as you can, build as much as you can, get as much traction as you can before fundraising. The more you can prove out, the more you can develop the business the easier it will be to fundraise and the less equity you have to give up of your business. Two: Do the hard things. Sometimes entrepreneurs tell me that they need much money to do some hard things, but I could tell that they don’t actually need any money at all to do that, they don’t need to hire an incredible developer or land a big customer or something like that, because I’ve seen other companies where the founder don’t have the money and they persuaded that amazing developer to quit the 6-figure job and take the risk or convinced big corporate customers to come on board while a company was still tiny, I’ve seen entrepreneurs go out and sell the product they hadn’t even fully built and then used that revenue to actually build an MPV that solves the pain point enough so that they can start fundraising at a completely different level. When you do the hard things, it’s very impressive because VCs know that those things are hard and it will give them more conviction to back you. The last: Be very careful about how you fundraise and the dynamics of the deal you’re putting together. Are you shooting for the highest valuation but you have a bunch of aggressive terms you’re agreeing to? It is, probably, a pretty big red flag and you should think about a lower valuation. Are you bringing a partner that you don’t know or really trust? It’s a huge red flag. It’s better to go with the better investor at a lower valuation. Be very thoughtful about the dynamics of the deal and do what you can to optimize for long-term relationships based on that dynamics.