Editor's note: Our Splash Health, Wellness and Wearables event is coming up on March 23 in San Francisco. We'll have Mario Schlosser, Founder & CEO of Oscar Health, Brian Singerman (Partner, Founders Fund), Steve Jurvetson (Draper Fisher Jurvetson), J. Craig Venter (Human Longevity), Lynne Chou (Partner, Kleiner Perkins), Michael Dixon (Sequoia Capital), Patrick Chung (Xfund), Check out the full lineup and register for tickets before they jump! If you’re a healthcare startup and you’re interested in being part of our competition, learn more and register here.
Also, vote for your favorite healthcare startup before February 16! Vote here!
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh how times have changed. While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
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.
Peter Hsing is Co-Founder and Managing Director at Merus Capital.
Before co-founding Merus, Hsing was Managing Director of the Corporate Strategy Group at Microsoft, where he led a team in identifying and evaluating several $1 billion+ growth opportunities.
Prior to joining Microsoft, he was an Associate in JP Morgan's Telecom, Media & Technology investment banking group and Private Placements team in Hong Kong and a management consultant with Price Waterhouse in their Dispute Analysis and Corporate Recovery Services group. He started his career in technology in 1988 as a marketing intern with IBM.
Peter holds an MBA in Finance from The Wharton School, University of Pennsylvania, and a BS in Industrial Engineering from Columbia University.
VatorNews: What is your investment philosophy or methodology?
Peter Hsing: We honed our playbook for investing in enterprise software during our time at Google and Microsoft. We've always believed that the future is all about digitizing reality—creating a digital representation of reality.
VN: What do you like to invest in? What are your categories of interest?
PH: We only invest in what we call "real software solving real problems"--these are enterprise software companies trying to solve big economic problems for their customers.
Once reality is in the form of ones and zeros, whatever you're modeling can be more easily analyzed, optimized, or visualized with software. Specifically, digitizing reality includes AR/VR, AI, and all things autonomous.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
PH: Some of our most successful companies so far include AdRoll, AllClear ID, and Symphony Communication. In each of those cases, the founding teams were exceptional and each has taken a long term approach to building a durable franchise.
VN: What do you look for in companies that you put money in? What are the most important qualities?
PH: Every investment we make must pass the three "T's:" Team, TAM (total addressable market), and 10x.
It starts with the team--in our judgment, they must be exceptionally strong. They have to be going after a big opportunity--"real problems" that businesses face. And their solution must be at least an order of magnitude better than anything out there today and for the near future--"real software." In other words, we invest in exceptional entrepreneurs building "real software solving real problems."
The vast majority of investments we pursue come from our collective networks. With our Google and Microsoft networks at the core, we’ve been building a broad network of software-focused founders, technologists, and executives for over 20 years.
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?
PH: As for traction, we follow "More's Law"--more is better! That's tongue-in-cheek. Having commercial traction is not a prerequisite to getting funded as risks we perceive will ultimately reveal themselves in the termsheet.
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?
PH: There's no standard profile for whether you're raising a seed or A round--you have to go out and test the market, i.e., do your own price discovery. It takes a lot of effort and time and is, in most cases, a necessary distraction. Stay in touch with vetnture capitalists that you want to work with. Create a competitive bidding situation when the timing is right for you/the company.
At the seed round, you're probably not taking on a new board member, but at the A, you most certainly will. Don't think of it as "giving up" a board seat--you're gaining a partner who you want to help guide/help you for the next 10 or more years. So, be extremely thoughtful about who you partner with. Do *your* diligence.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
PH: There's no well-defined career path to becoming a venture capitalist. It's all about experience, judgement, and relationships and that can take a person down a lot of routes.
When I was younger, I was an avid reader of sci-fi/fantasy novels--earliest I can remember was the Tom Swift series--and the future always was about tech, so I've always been infatuated with the impact of innovation. I was the kid who begged my family go see Star Wars during our family vacation during the summer of 1977 where my dad was like, "We're in Cape Cod and you want to go see a movie?!" I was also the kid who begged my parents to get my brother and I the Atari 2600 for Christmas. The digital future was just always so much cooler!
So, with my love of tech and my obsession with NYC (I grew up in CT), I attended the engineering school at Columbia. I helped fund part of my education by working as an intern at IBM on Madison Ave. starting in my sophomore year (more tech). From there, I worked in corporate restructurings at PriceWaterhouse where I became an Oracle DBA and wired up SCO Unix terminals, got my MBA in Finance at Wharton, and then was recruited into Microsoft's Corporate Development group, where I met and worked closely with my two business partners, Sean and Salman, starting in 1999.
In late 2004/05, when Salman and Sean left Microsoft to run Google's Corporate Dev team, I took over Salman's role as head of Corporate Strategy at Microsoft. As MD of Corp Strat, my team and I brought the company into the era of SaaS via the first offerings of what is now branded as Microsoft Cloud. Like the Blues Brothers, we (Sean, Salman, and I) got the band back together in 2008 to firm our own venture capital firm, Merus Capital.
I'll point out that I've been extremely fortunate to be a part of small, high-performance teams, whether at PWC, JP Morgan, or Microsoft, and have had strong mentorship via my manager(s). I feel that one cannot have enough mentorship early on and advise that one should be proactive in seeking a mentor(s). However, one must realize that, as with all relationships, there needs to be a "fit" both ways, so it takes time to find a good match.
VN: What do you like best about being a VC? What makes you excited?
PH: I meet super-smart, passionate entrepreneurs that are trying to make their mark on the world. I learn something new from them every day and they give me a glimpse of the future, today. I have two incredible partners with whom I've enjoyed working with since 1999 and who I deeply trust and respect.
Together, with the backing of our amazing investors, we get to build our own business--Merus was a startup back in 2008 when we launched our first fund. We're entrepreneurs as well, so we have a ton of empathy for startup founders.
VN: What is the size of your current fund?
PH: We closed our third fund of $85 million last year. While we had a few endowments and foundations in our first two core funds, with this fund, we were able to significantly expand our investor base with the addition of one of the largest US foundations, a major university endowment, and a large, international fund-of-funds.
VN: What is the investment range?
PH: Our investment size ranges from $500k at the seed stage to $5 million or more at a Series A round.
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?
PH: We don't have a firm target percentage ownership as each investment opportunity has unique circumstances. However, venture capital is inherently not scaleable, so we do need to have enough ownership to make it worth our time, as the hard constraint is the amount of time we have to devote to each of our portfolio companies.
VN: Where is the firm currently in the investing cycle of its current fund?
PH: We're actively investing our third fund and have closed 7 investments in the last 9 months.
VN: What percentage of your fund is set aside for follow-on capital?
PH: We reserve about 50% of our funds for follow-on investments and have also raised Special Purpose Vehicles (SPVs) for larger or later follow-on rounds.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
PH: We make our initial investment at the Seed or Series A round.
VN: In a typical year how many startups do you invest in?
PH: We might lead 3 Series A rounds in a typical year and make a half dozen seed investments. We prefer to keep our portfolios relatively concentrated.
VN: Is there anything else you think I should know about you or the firm?
PH: Every firm is a bit different in style, structure and focus but similar to Benchmark, we have an equal partnership where founder interaction is always with a decision-making partner. Similar to Emergence, we have an enterprise focus. Venture is a state of coopetition where we might compete with a firm one day, only to co-invest with them the next.
What's made Merus successful has been maintaining a consistent investment approach. Consistent team, investment focus, and analytical approach. We also try pretty hard to not pay attention to what other investors like or don't like about a certain opportunity. So maintaining independence of thought is also important to our model.