There has been a big debate over the last few years over whether the Series A crunch is real or not. What everyone can agree on, though, is that there are definitely more seed and early stage funds now than ever before, and more people willing to give money to young companies looking to make it big.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Cheryl Cheng is a partner at BlueRun Ventures.
Cheng joined BRV in 2008. She focuses on early stage consumer and mobile big data opportunities. Prior to BlueRun, she worked at Clorox and The Sharper Image launching new products and driving retail marketing with partners across Target, Walmart and grocery.
Cheng has a B.A. from Stanford University and an MBA from Kellogg School of Management where she was a Forte Scholar. She is a mentor at Stanford’s Bio-Design for Mobile Health course, a collaboration between Stanford’s School of Medicine and School of Engineering.
VatorNews: What is your investment philosophy or methodology?
Cheryl Cheng: Let's start with a venture landscape perspective first. People usually say 'venture capital' in one big breath but there are many nuances to the ecosystem and there's a big different between an early stage, angel investor, and a late stage growth equity type of firm. So those are inherently different in the way that they think about opportunities, evaluate opportunities and work with companies.
Our role in the venture ecosystem is to be an early stage investor. We are an institutional investor. We take an active role at the early stage with our entrepreneurs. We take a board seat and leverage our operating backgrounds. We focus exclusively on late seed to Series A opportunities. We generally invest as a lead investor in those rounds, and we stick with our companies through follow on funding and through later stages. That's where we stake our value in the ecosystem and to the entrepreneur.
VN: What do you like to invest in? What are your categories of interest?
CC: The other angle, or way that you can look at the ecosystem, or venture, is to look at segments. We have always been a mobile-focused venture firm. We have been since 1998 when we started and our focus areas are, thematically, mobile software and services, and fintech.
The undercurrent of that is we look at technologies that are data driven. We believe that data is the currency for the future in terms of creating value within companies, and for companies. We look every very much at technologies that are either creating new streams of data or leveraging existing streams in a unique way so that you can improve decision making, either for the consumer or for the enterprise.
Within mobile software and services, we'll invest in everything from health to entertainment to education and they're all very different, and we're agnostic to that, but we do look at how data is coming in to influence how that industry is doing their work.
When we invested in Waze, it's more around transportation and maps, but the ability to take real-time data and influence how a person is going to drive as their going 70 miles down the freeway is a game changer. The way Kabbage is taking data from all of these disparate sources to score credit worthiness for small businesses is very different than the way traditional banks have issues small business loans.
So, we do look at verticals and certain spaces that we like, in health and fintech, etc, but, more importantly, we look at the real-time data layer that companies are building, and what is the technology that they're using to factor that.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
CC: We were the first investor in PayPal, which is a very iconic company and a very different company today than when we first invested.
What we saw was really the opportunity to build foundational pipes that were secure for transferring money. PayPal eventually became what enabled eBay to be the commerce platform that it was. Because you had all of these small merchants. They weren't even merchants, they were individuals, who wanted to be able to enact commerce, but they had no way to actually get those payments to happen in electronically, and in a secure way. So PayPal offered the ability to person-to-person commerce, as opposed to business to a consumer commerce.
From PayPal we were led into Waze and into Kabbage. Kabbage more obviously because of the fintech angle, but Waze because of our ability to understand and grow massive networks in a secure way, and in real time. Waze was building real-time traffic networks and location data, and that's highly private. The ability to help build that kind of system, although it was for a different industry, was important to the founders of Waze.
Another company that I think people here in the U.S. don't know much about, but was one of the largest VC exits last year, is a company called Ganji, which was a company that we invested in out of China, and we structured the spin-out of Ganji from Google. They were the mobile Craigslist in China, classified ads. We really saw an opportunity in China, where mobile was a leapfrog technology for consumers, and the younger generation was increasingly moving to urban centers, and what do they need? They need to find an apartment, they need to find a job, they need to buy things, and a classified ads service like Craigslist didn't exist there. So we invested in Ganji, which exited last year for about $3 billion.
VN: What do you look for in companies that you put money in? What are the most important qualities?
CC: The founding team is very important. We want to see a founding team that has a big vision. That either they come from the industry and really understand the problem, or they've studied it intensely and understand how they may be disruptive to that industry, and that they have a big vision for really being able to create new value, as opposed to just transferring value from one side of the equation to the other.
Second, we look for founders who have demonstrated that they can execute. Even if it is on a small scale, because these companies are early stage, we want to see that the founders are thoughtful, they can grow teams, they can demonstrate leadership, and they really have an instinct for product at the early stage. That's quite important.
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
CC: There is no one metric for everything. We invest in mobile services that are focused on enterprise, versus consumer, so obviously the metrics can be quite different, so we don't hold everybody to one metric.
We do look for traction, mainly because, in today's environment, a Series A is much more developed than it was 8-10 years ago. We were the first investors in Coupa, which is an enterprise software company, procurement company, that went public in October. We did the first round, which was only a $2 million Series A, but it was called a Series A. Today, entrepreneurs would never call that a Series A. They would call it a pre-seed round, or maybe they would call it a seed round. If a company comes to us having raised significant angel money before, and they're coming to raise a Series A, we do expect traction, because you have raised capital, and you are further along.
VN: How long does it take before you meet a startup and make an investment and how do you conduct your due diligence?
CC: I think there's formal due diligence, and then there's informal due diligence. We like to spend a lot of time on informal due diligence, which is getting to know companies way in advance of them actually needing financing. For us that typically means getting to know them sometimes even when raising their seed financing. We are very up front about the fact that they they are going to be too early for us but we still want to keep them in our network, and try to be as helpful as possible, and that can be as early eight months before they actually need to raise their Series A. We'll meet with entrepreneurs, and we'll get to know them. We'll invite them to events that we do with our firm and with our portfolio, as a way to casually get to know them. It's due diligence, technically. We're getting to know a founder, understanding how they think and operate, and getting updates every couple of months on how the business is doing.
Formal due diligence, if we meet someone who's officially coming in to raise an A when they walk through our door, we'll generally spend time looking at the technology, talking to the team, doing customer references and doing personal references. We really believe in, once you make an investment it's kind of like a marriage. There are marriages that don't even last as long as the time that a Series A investor works with their companies. We definitely don't take it lightly, and we want to make sure that we're the right investor for the entrepreneur, and that they're the right entrepreneur for us. We don't take it lightly, and we don't expect entrepreneurs to take it lightly either.
VN: Given that these days a Seed round is yesterday's Series A, meaning today a company raises a $3M Seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes to get that Seed round? Since it's a "Seed" does it imply that a company doesn't have to be that far along?
CC: I can't speak for all seed investors because I think the seed environment is evolving quite quickly. There are still the traditional angel investors, generally wealthy individuals, that invest small amounts into entrepreneurs that they think are inspiring, or will do great things.
There's also institutional angel investors that have funds and teams and a lot more formal investing regiment to what they do. All of that is lumped into angel investing or seed investing.
VN: What are the attributes of a company getting a Series A?
CC: There is a pretty broad range of companies raising Series A these days because the range of seed funding really varies. Venture round nomenclature is less important to us. We look more at how much funding a company has taken and how much progress they have made with those funds. In general, we expect Series A companies to have a product in market, at least in a beta. We also expect some proof in the business model and product market fit.
VN: Given all the money moving into the private sector, I believe there's more money going into late-stage deals in 2015 than there was during the heyday, back in 2000, do you think we're in a bubble?
CC: Yes, I think we were in a bubble. I think that there were companies that justified their valuations. I think that a billion dollars, that unicorn number, it's a little bit of an arbitrary number.
Were there a lot of companies that reached a very high valuation last year? Yes. Did all of the underlying businesses actually justify those valuations? No. And so what you see when you talk about the bubble deflating is that businesses that needed to grow into those valuations, and failed to do so, they won't be able to sustain an up round in the next round. Businesses that were able to grow to justify those valuations will continue to hold those valuations and they will be ok.
VN: If we're in a bubble, how does that affect your investing?
CC: We think of ourselves as being deep in the roots. At Series A, we're pretty close to that seed level, and, so, by the time a company grows up to be a relatively large tree, and if the wind is blowing with market variances those swings don’t affect the early stage investor as dramatically as they affect the late stage investors, just by nature of how early we got in.
When you're early, there is a lot of risk. The risk is more around infant mortality, than it is around by the time you’re a billion, or multi-billion dollar, company.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
CC: This is not something I always wanted to do. My parents are immigrants. My parents never told me what venture capital was. I don't think they even know what venture capital is today, even though this is what I do.
I grew up a combination of the Midwest and California. I was first exposed to Silicon Valley when I went to Stanford for undergrad. My entering freshman class at Stanford was the first where everybody got an e-mail address, and I didn't even know what to do with my e-mail address. I was like, 'Do I check my e-mail? Is something supposed to happen here?' But that was sort of the beginning.
When I got out of college I went to Broadview, a technology-focused investment bank. I worked on consumer Internet and software M&A transactions, and it was really an opportunity for me to get the lay of the land, and to understand who were the emerging technology platforms. My firm acquired a London-based venture capital firm and I was part of the team that opened the west coast office. I got to learn about venture capital as an industry. In the beginning, I really did not like it, because I felt like I had no experience and I was determining the fate of entrepreneurs. I would build these incredibly elaborate excel models and they would very academically prescribe what would be success for a company. I just felt inherently that that was wrong.
I left and went to business school, and when I came out I left tech altogether. I went to Clorox and worked on new products. I wanted to be at the center of new product innovation. It was incredible training ground for me, in terms of how do you deliver innovation for product, holistically, for a business unit and also for a Fortune 500 company.
I eventually came back to venture, into tech, in 2008, when I came to BlueRun. I loved my time at Clorox, but it was really a combination of fortuitous events that were well timed. At BlueRun, I love working with our companies above all else. Each company faces its own set of unique business and product challenges. I love being able to leverage my operating experience and network to help where I can.
VN: What do you like best about being a VC? What makes you excited?
CC: I love being an enabler for entrepreneur to pursue and achieve their dreams. I love being able to learn something new every day, through new companies that I meet and I love being able to be a part of helping entrepreneurs be successful.
You are in a very unique seat of privilege in venture. You have a strong fiduciary obligation as steward for your investors, and that's important, but day to day, working with our entrepreneurs is the most fun. That's the most exciting to me. It's so easy to get complacent and settled into how life is and I saw that start to happen in the CPG world, where the companies move slowly, and they don't see when new trends sneak up on them.
VN: What is the size of your current fund?
CC: Our current fund is $150 million
VN: What is the investment range?
CC: Every company is a little bit different, but we typically invest somewhere between $2 million to $4 million initially, as part of the Series A, and then we always have reserves for a business where we'll do follow-on financing. Typically in our companies we'll have invested somewhere between $10 million to $16 million in the business over course of its life, either to IPO or M&A.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
CC: We do care about it. I would say we're pretty typical Series A investors who shoot for 20 percent to 25 percent. I think most entrepreneurs who come to Silicon Valley are pretty educated on a round by round dilution perspective. We don’t have out of bounds expectations on ownerships.
VN: Where is the firm currently in the investing cycle of its current fund?
CC: Our most current fund is a 2014 fund, so we are still investing out of that fund. We've done probably about two-thirds of the investments that we will do, and then we will cut over to the next fund. This is our fifth fund.
VN: What percentage of your fund is set aside for follow-on capital?
CC: There's no hard and fast rule for that, to be honest. We don't say, 'Ok, 30 percent goes into new, and then 70 percent is for follow-on.' What we do is look at each individual investment and one of the conversations we have with entrepreneurs is, 'How much money do you think this does this business needs? Not just this round, but in general? Do you need $50 million for profitability? Do you need $70 million? Do you need $100 million? What does this look like?' And, obviously, this is not going to happen over the first year or two, but that's a conversation we have. So, when we make a new investment, we also then create a reserve for that business based on that business. It's not like everybody gets $10 million, and that's it. Every fund has been different. We don't have any guidelines, we just know that every investment that we do will have reserve attached to it.
VN: In a typical year how many startups do you invest in?
CC: We will do about 6 to 8 new investments a year. That's for the firm, not for me personally.