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Chu was previously a Partner at Cornerstone Equity Partners
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.
Prior to co-founding Grayhawk in 1999, Chu was a Partner at the predecessor firm of Cornerstone Equity Partners. He began his venture capital career with Banc One Capital Partners as Associate and later Assistant Vice President.
Chu has served on the boards of 12 privately held companies. A sample of prior successful investments includes: New Century Financial Corporation (NASDAQ: NEW), ESS (acquired by IHS), QCSI (acquired by Trizetto), and ITax Group (acquired by First Advantage).
He holds a Master of Business Administration from Texas A&M University and a Bachelor of Science in Marketing from the University of Arizona.
VatorNews: What is your investment philosophy or methodology?
Sherman Chu: We invest in early- and growth-stage technology companies in underserved markets.
VN: What do you like to invest in? What are your categories of interest?
SC: HIT, Fintech, Cybersecurity, Big Data, IOT and Enterprise productivity.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
SC: QCSI, New Century, Efficient Networks, Coinstar. These companies addressed very large markets and in most cases owned sophisticated and proprietary technologies.
VN: What do you look for in companies that you put money in? What are the most important qualities?
SC: We will closely examine seven to eight key variables, but the top 3 are as follows: Management (integrity, coachability, track record, cohesiveness), market size ( greater than $1 billion, competitive landscape, etc.), product (value proposition, uniqueness, defensibility, unit economics).
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?
SC: Generally we are looking for greater than $1 million in trailing twelve months revenue.
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?
SC: Grayhawk will occasionally invest in seed rounds. The primary risk mitigant for a company without revenue traction is quality of management team.
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? And if we're in a bubble, how does that affect your investing?
SC: Yes, I believe we are in a bubble. Holding firm on valuations and investing slower much like we did with our prior fund. As a 2000 vintage fund our prior fund was able to avoid the catastrophe of many other funds and, in fact, generated good returns to our investors.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
SC: I learned about venture capital in graduate school and became exposed to it while working for Banc One Capital Corp. I really enjoyed the opportunity to apply the concepts that I learned in the real-world investment decision process. It entailed a broader set of variables which requires much more thought process and analysis versus, say, commercial loan underwriting.
VN: What do you like best about being a VC? What makes you excited?
SC: I enjoy the intellectual stimulation from all aspects of my work (from the analysis side to the board involvement) and the opportunity to participate in the growth and success of the young companies that I work with.
VN: What is the size of your current fund?
SC: It is a $70 million fund.
VN: What is the investment range? How much do you put into each startup?
SC: Between $1 million and $5million. We are typically investing $2 million to $2.5 million in Series A rounds.
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?
SC: No, there is no typical percent we look for.
VN: Where is the firm currently in the investing cycle of its current fund?
SC: We are two-third into the new investment phase.
VN: What percentage of your fund is set aside for follow-on capital?
SC: Depending on different variables, i.e., stage, capital intensity, syndicate capacity, we will reserve 100 percent to 500 percent of initial investment.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
SC: Typically, post seed and series A.
VN: In a typical year how many startups do you invest in?
SC: We will invest in three to five companies per year.
VN: Is there anything else you think I should know about you or the firm?
SC: We are a small firm with a long and successful track record and known to work well with our portfolio companies! With more emphasis on capital efficiency and the right financial and business disciplines, we are not as dependent on the unicorns to generate strong returns to our investors.
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Grayhawk Capital provides venture capital to outstanding early and growth stage companies located in the southwest U.S. Grayhawk is currently investing an $80 million fund.
The partners of Grayhawk Capital, collectively, have 60+ years of experience managing 8 venture funds, totaling more than $500 million. Our investment philosophy has remained consistent through the years and we target the following:
- Serial entrepreneurs and exceptional management teams
- Dynamic, rapidly growing technology markets
- Innovative and disruptive products
The sectors for investment include mobile computing, cloud/SaaS, security, enterprise and application software, business intelligence, healthcare IT, and Financial.