The Games Fund is a Moscow-based $50 million early stage fund that launched last weekRead more...
Goldhaber was founder and CEO of Cybergold, Kaleida Labs and Centram Systems West
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 Claremont Creek Ventures, Goldhaber was founder and CEO of Cybergold and founding CEO of the multimedia joint venture between IBM and Apple, Kaleida Labs. He was also the founder and CEO of Centram Systems West, developer of the first IBM/Macintosh local area network (TOPS), and acquired by Sun Microsystems where he served as Vice President. Goldhaber was the President of the venture fund Cole Gilburne Goldhaber and Ariyoshi.
He also served as Special Assistant to Pennsylvania’s Lt. Governor, William Scranton, III and ran Pennsylvania's Energy Agency as its Interim Director.
Goldhaber holds Masters and PhD degrees in Education and is an emeritus member of the Executive Board of the College of Letters and Science at UC Berkeley. He is an Advisory Board member of the Lester Center for Entrepreneurship and advisor to the Center For Entrepreneurship and Technology (CET) at UC Berkeley. He serves as a member of the US Secret Service Electronics Crime Taskforce and is an Emeritus Board Member and Advisor to the Federation of American Scientists.
VatorNews: What is your investment philosophy or methodology?
Nat Goldhaber: We do an unusual thing in our investment program, which is something that we refer to as "lifecycle venturing." That means that we actually intersect with entrepreneurs and companies at extremely early stages of their development. There are instances in which we have literally gone and walked the halls at U.C. Berkeley and invested in a guy who's a recent post grad, still doing research. Our idea is that, by intersecting with a company at that stage, we can help a budding entrepreneur develop their idea into something that is, ultimately, commercial.
We believe that our collective expertise in the fund, with many years of funding startup companies, and also starting our own companies, pretty much every one of us has started a company and taken it public,-allows us to work with entrepreneurs, based on our experience and, more importantly perhaps, with credibility to allow us to give the right kind of advice at the right time to the entrepreneur, and to have them believe us because we did it ourselves.
Then, of course, if a company matures properly, and we believe that it continues to commercial viability, we then go out and assist in raising an A round. We participate in that A round,.And we participate in all subsequent rounds till there's some form of liquidity. There are multiple benefits to this. We call it lifecycle venturing because let's say we put a couple of hundred thousand bucks at that early stage, we're then able to see whether or not the company and team hold promise. About 50 percent of the companies that we invest in that early we do not continue with. The ones that we do continue with are the ones we think are good. So, in venture capital speak, the best $100,000 investment you'll ever make is to determine whether or not a company has the potential to succeed. So we think it's a good way to do it, and I think many of our most successful companies come through that route.
VN: What do you like to invest in? What are your categories of interest?
NG: Most of my investments have been in what I think is typically called cleantech, or energy technology, and that's what I have, so far, with one big exception, been interested in.
I like to find that companies that use sophisticated algorithms to bring about greater efficiency in energy consumption or energy generation. That's been my sweet spot. I also now have one investment in genetic diagnostics, which is the theme for the fund, but this my first company in that domain. I've only done one, but I expect to do many more. I'm quite interested in the area, and I think it holds enormous promise for really changing medicine.
I like to say that "Our job is to find the signal and the noise." I think that has held true, not in every one of our investments, but in many of our investments, where we are looking to find methods of doing optimization or discovery that are complicated to do because there's lots of garbage information. That's certainly true in most of the things that I've invested in in energy, where you take lots of data that's coming in and you try to look at that data. I suppose it's a big data problem in the end analysis. Maybe my categorization of finding the signal in the noise is really what everybody else nowadays is calling big data. I coined that before there was the term big data, so finding the signal and the noise is my thing and I think that's true in genetic analysis as well. You want to find out, of the terabytes and terabytes of information that are generated every time you do a genomic sequence, what actually are the salient issues. What are the salient issues, and how do deal with those. How do you capitalize on saliency? Capitalize in the sense of taking advantage of it and come out with great healthcare. In some sense energy and genetic analysis are really similar problems. They're the problems of collecting data from sensors, or collecting data from genetic sequencers, and being able to do interesting things with the data you're looking at.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
NG: We invested in Natera, a company that provides pre-natal diagnostics. With a simple blood test of a pregnant mom, we are able to separate out the fetal DNA from the maternal DNA. We take a look at the fetal genome, and we discover whether or not there's any problems in the genes. Then we inform the parents, and they can make a decision about what they want to do. So all the standard Yesterday’s standard of care was amniocentesis. Sick a needle in the mother's belly and withdraw amniotic material. We can now do much more directly with a simple blood test, which is much less dangerous than amniocentesis for the mother and unborn child. We've done a million or so tests doing that, so far, and it’s very effective and, from a healthcare standpoint, an inexpensive product. Natera is a traded company on the Nasdaq.
We have another company, Assurex, that does cheek swabs and determines which drugs are most likely to be effective for psychological problems. So we take a look at the full spectrum of psychotropic drugs, and are able to predict which will work and which ones are dangerous to the patient base on the genetic analysis of the cheek swab. And it's never ever been done before. We're the very first to do anything like that. That's another case of looking for the signal and the noise in the terabytes of information that come from genetic analysis.
A third company we're involved in, and one I'm on the board of, is DNAnexus, and that is a company that helps other companies do genetic analysis in the cloud. So they've got a huge number of geneticists and computer scientists and data scientists on the team. They help suck the data out of the genomic sequencers, carry it off to the cloud, mostly AWS, and do computational work on it, then return salient, observed results back to the investigators, whether they are healthcare providers or they are research scientists.
In the energy sector, one of our investments is called Ecofactor, takes data by sampling the thermostats in people's homes, does an analysis in the cloud and provides heating and air conditioning optimization. It's used by Comcast, and it's used by a couple of electric utilities that are doing that, and also be used for the purposes, and “demand response.” demand response is used when a utility knows that there's going to be more demand for electricity than they can produce and their alternative is to go buy very expensive electricity from another grid. They sometimes will ask consumers of electricity to cut back the demand. It’s really, really expensive to buy from another grid. That's how PG&E went bankrupt. They would much prefer to pay a small amount of money to people who are the consumers, saying cut your energy demand back. EcoFactor can do that on behalf of the utility. Nevada Energy, which provides electricity to most of Nevada, uses our product for exactly that purpose.
So we send out a signal to the thermostats or people who have electric heating or air conditioning. We’ll change set the point, so there's bigger spread. So it'll get little hotter than normal, or a little colder than normal, depending on whether you're heating of air conditioning, during that period, and hence use quite a bit less electricity. So there's two functions. Energy efficiency, on the one hand, and demand response on the other. So energy efficiency is optimization of air conditioning, that is, don't run the air conditioning when you're not home, turn it on, in advance, before there's peak demand, so maybe cool the house a little bit more than you otherwise would, and then you let if drift up when peak demand occurs and then everybody is happy, and you are using electricity at the lowest possible price. And then, of course, there's demand response, which is a different function. So it does both of those. It's very cool. Or hot, as the case may be.
One of the most fun companies we've invested in is a company called Building Robotics. It is the first instance in which the people in a corporate environment are queried directly about whether they are comfortable. So if you're on a big floor, with lots of cubes, and you are constantly cold, you can now literally go to your iPhone and say, "I'm too cold," and it will change the set point of the valve that's letting cold air in that's above your head, or above the head of the people who in your immediate environment. The product is called Comfy, and it asks you three questions: are you too hot? Are you too cold? Or are you comfy? And you have that on your iPhone and you can materially change your comfort level. And it's extremely popular, because everyone who works in a big corporate environment knows they're way too cold in summer or way to hot in the winter We have overcome of the silly designs in the air conditioning system settings and given the individual power ove their environment. So now everybody is their own thermostat.
VN: What do you look for in companies that you put money in? What are the most important qualities?
NG: Don't forget that we're putting money in very, very early so the team is not anything like solidified. Basically you have an entrepreneur, an inventor, sometimes even a scientist, who is the one who's building the whole company. That gives us the opportunity, basically, to build a team around them. If we invested later in a company, for example if we came in on a B roundor on an A round, then we would expect to see a real team in place. And what a real team means is people who have had experience, or seem to be manifestly capable of building a business from an idea. When it's a single scientist working in a laboratory, what we're looking for is the idea sufficiently world changing that we can envision a big business being built around it? And that person is not at all necessarily going to be the CEO of the company. Even if they formed a company they may not be CEO long term. We're very frank with people if we think that they need to add talent to make the company a success. We don't mince words, we're pretty straightforward. So if find a company that really looks good, but the people are wrong, and the founder says, "No, I'm going to be the founder and I am going to be the CEO indefinitely," then we wouldn't invest.
Let's take a good example. We have a company called Alphabet Energy. That was an instance where there was literally a post doc at U.C. Berkeley who had taken some research data from Lawrence Berkeley Laboratory on how to use very simple, inexpensive material to convert heat directly into electricity. Now, thermoelectrics are known, but all thermoelectrics, prior to this company had been relatively expensive to manufacturer and required exotic materials. These guys came up with the methodology of converting heat into electricity using very simple material, namely just silicon, using what they affectionately referred to as hairy nanowires. So we thought that because of the economic and environmental costs of natural gas and oil it is beneficial to curtail waste. In any instance in which they are consumed, there's enormous waste heat. Is there way to recapture to recapture that waste heat and convert is back to electricity? Whether it's the exhaust gases from automobile, even a hybrid, maybe particularly hybrids, or whether it's the heat going up the chimney at a ceramics plant, how do you take that heat and efficiently convert it back to electricity. This post doc at U.C. Berkeley was working on it and we thought it had merit and we invested very early, We also liked the post doc himself, who, in fact, does remain as CEO of the company. They are seeing multiple millions of dollars of revenue, and they are mature stage and they are in discussions and negotiations with a whole variety of different companies who are likely to be very significant consumers of their product.
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?
NG: Alphabet had a credible PhD, who had research that came out of Lawrence Berkeley Labs and U.C. Berkeley and was perfecting it and was building the first instances of a functional prototype. By the way, that was the stage. He hadn't even built a full prototype. He was really still messing with the early stages of the technology and we took a risk, based partially on him and based partially on the promise of building an inexpensive way to recapture waste heat. Now if you really have the way to recapture waste heat on a massive scale it's a big business.
We're better off if there's a prototype. A PowerPoint deck is less persuasive. It's great to see a prototype, even if it's a very, very early per-production prototype, it's still so much better than just trying to imagine it. That said, there's a company that is capitalizing on a technology that was developed by a big corporation, that was spun out by that big corporation, to these individuals. The technology was for a completely different purpose, but it's clear that the technology can be repurposed for something that has mass applicability. And so even though there isn’t a prototype of it's ultimate applicability, there is a prototype of an instance of it that was built for a completely different industry. So that's one where you can sort of see something happening, but you have to assume that they have the skill to be able to redirect it to a much larger business. That's interesting.
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?
NG: Don't forget that during the bubble in 1999, two dogs with a PowerPoint slide,deck particularly if one of the dogs had actually gotten an MBA, could get $10 million, easily. So we've seen this story before. It didn't turn all that well Further, part of being a VC is having patience, cause it takes fives, and sometimes more, years to mature to a point of liquidity. So, yeah, it's true.
In the areas where we invest it's less true. In anything that has the Internet involved, whether it's commercial product or a social networking product, or a crowdsourcing product, people are getting very much like 1999 valuations. It doesn't take much to get a big valuation. We don't invest there. On the other hand was also missed Google. We weren't around when Google started but we missed Facebook, we were around then. But we got Natera, and I think we're going to do very well on that. And that was not a super high valuation when we got to it. So, in the areas where we invest it's less of an issue than it is in other areas, not to say it's not an issue at all, it is.
The bottom line is that there are massive amounts of capital floating around, and they're all looking to alight on a company that's going to return massive amounts of capital gain. Yes, valuations have gotten higher. The fact that we go in so early allows us to participate at an early stage when valuations really are not very high. All that said, you are absolutely correct that there's been a blurring of the lines of where angels are, and friends and family are. Now you have crowdsourcing, crowdfunding, which is also producing significant amounts of capital for early stage companies. It's a very different world than it was, a few years ago. Plenty of room for us, but it's a very different world.
VN: What are the attributes of a company getting a Series A?
NG: When you get to the stage of a Series A, we want to see that they have taken their concept and, if not built a prototype or a service, at the very least built a completely coherent plan on how the interest of the company will continue to be advanced.
Let us take a company, for example, in the payments business. They may have the concept that they want to be the credit card for people buying pet food. I'm making this up; we did not invest in such a company. But let's say they want to be the credit card for buying pet food, that was the alpha, the concept. Let us say that we thought they were really good entrepreneurs, and we wanted to back them, so we gave them a small amount of money. By the time we get to an A round, they better have adequate discussions going on with some payments institution to be able to prove to us that they can carry it to the next stage. Then, if they had, for example, relationships with some of the bigger banks, or with one of the credit card processors, and those potential customers, or providers of services, were enthusiastic about what was going on, that would probably be a prerequisite to doing an A round. Ideally they got even further than that with their seed money. They got to the point where they're actually beginning to let some pet stores distribute these cards. The pet stores are already giving out the cards like crazy, or they figured out how to incentivize the pet stores to give out applications for the credit card, or discount on dog food whenever people buy it along with the credit card and it's actually working. Then certainly we would do an A round, and then a B round would be to continue they work that they did in the A round, and the C round would typically be for expansion.
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?
NG: Yeah, I think we're going into a bubble, but I think one has to very carefully watch what are the liquidities that are occurring. Don't forget, venture capitalists don't make any money whatsoever unless the companies they invest in either go public or get sold. There isn't any other alternative. If it's just sitting there, and spinning off a profit, it doesn't help a venture capitalist at all. So there has to be some form of liquidity. Period. So the question is, are we seeing as many liquidities as we have seen historically? When you take the valuations, the initial, early valuations on the one hand, and a very low level of liquidities on the other hand, you have to ask yourself if the risk is worth the potential reward. When the risk is far greater than the potential reward, AND when you have a few companies that are spectacularly rewarding, then all of the sudden you begin to get in these bubble situations, where people are still throwing money in, in hopes of having one of those spectacular outcomes, and in fact it's very unlikely that would occur.
It would be like going out and buying $10 million worth of lottery tickets in the hope of getting the $1.5 billion payout.
VN: If we're in a bubble, how does that affect your investing?
NG: We look for those instances where think we don't think things are inflated. And we hope and pray that that's not an adverse selection process.
There are companies we don't invest in because they're already overvalued. If they became overvalued after we invest, would we continue to participate? When that happens, and it has happened, were we actually thought the valuation was too high, we tend to participate to the least extent that we can to maintain our position, or even if we lose some position in the company, we're willing to sustain that.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
NG: As I always like to say, "those who can do, and those who did become venture capitalists."
I started a company, which was ultimately called TOPS, which we sold to Sun Microsystems in 1987. It was a local area networking company. We built the first viable local area network for the Mac, and you could also hook PCs and Unix machines into the same network and share files everywhere. And that was a pretty successful company. For those days it was very successful, there weren't that many computers yet.
That was my first big success. I spent a year as a SUN vice president. And the venture capitalists who had invested in my company invited me to be a partner in their fund. That my first brush with the experience of venture capital, where I invested in entrepreneurs who I actually had met, and knew, through my company. And many of them did quite well. That was a fun experience, also the two guys who were part of that fund were just exceptionally brilliant and it really a huge pleasure working with them as I knew it would be. The firm was Cole Gilburne and I was there until we decided we were better off going our own ways. Not for any malice, but one of us lived in Hawaii, one of us lived in Los Angeles and one of us lived in Berkeley. We didn't get together often enough. It's not like we had a Monday morning meeting. Now that would be easier with things like Skype. Don't forget, that was before even e-mail.
That was about three years I guess, and then both of my partners became very senior executives at AOL and did extremely well. I went and started another company called Cybergold and I took that public in 1999. It was Internet marketing and advertising, a pretty early player. We merged with another company called MyPoints in 2001, and then that that new entity was acquired by United Airlines and if you get advertising with your frequent flyer miles card, it's still using the technology we developed, all these years later, amazingly enough.
After that I ran for Vice President of the United States in the 2000 election. That was fun. In New York I was on the Independence Party ticket, in California I was on the Natural Law Party ticket, and in Oregon we were on the Reform Party ticket. I was running with John Hagelin. I flew around the country and gave speeches and I was in the third party Vice President debate. We got a few hundred thousand votes.
And then, after that, I co-founded Claremont Creek Ventures, my current fund.
VN: What do you like best about being a VC? What makes you excited?
NG: By far the most pleasurable thing about being a VC is working with enthusiastic entrepreneurs. If you really want the ultimate criteria that makes me excited about investing, it's finding an entrepreneur who's so passionate about his or her idea that they wake up in the morning thinking about them, they go to sleep at night and dream about them, and there is nothing in universe that is going to stop them from making it a reality. That's fun. Working with people who have that level of enthusiasm. That's really fun, it really is. Sometimes they got it wrong, and then even though they have that level of enthusiasm you don't invest. Sometimes they have it right and you think it's wrong and they do succeed. It doesn't happen very often, but it does. And sometimes if you share their ideas, and you think they're think good ideas, and you work with them, that's the best. It really is, and it's very different world when that happens.
Then the entrepreneurs I have a very hard time investing in are what I call the "white shoe entrepreneurs." Back in the days when there used to be a show in Las Vegas called COMDEX, before that The Computer Show, COMDEX was filled with genuine entrepreneurs trying get buyers to look at the products they developed. They were there in their blue jeans, and their three days without a shower and it was the real deal. And then, when computers started to become really popular, and people were starting to make many hundreds of millions, even billions, of dollars on computer companies, you began to see people at those shows who were selling things like connectors, and accessory bags and all that stuff. Characteristically, like salespeople, they had white shoes. The white shoe entrepreneurs are people who say, "Well, they made billions of dollars on it, I can too." But they have no clue and no passion. They're out there just to make the money. Those people are very uninteresting to me. It takes five minutes to figure out who they are. You can just smell it.
VN: What is the size of your current fund?
NG: Our current fund is $175 million, and we have $300 million under management.
VN: What is the investment range? How much do you put into each startup?
NG: We're from$100,000 and I think the biggest investment we ever made was a $5 million or so in a later round.
In company that's starting to succeed, we invest a total of between $5 million and $11 million in A, B and C rounds. That's through liquidity, ideally.
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?
NG: We only co-invest, except for the lifecycle venturing round, and even there occasionally we're able to bring some other VCs in. In an A round we probably want to have somewhere between 30 percent and 50 percent of the round.
VN: Where is the firm currently in the investing cycle of its current fund?
NG: We're getting toward the end of fund II.
VN: What percentage of your fund is set aside for follow-on capital?
NG: A lot, is the answer. Leave out the lifecycle venture and let's say it's something we got to an A round in, we would expect to have two to four times the number of dollars that go into the A round available for future rounds. So if we put $1 million in, we would expect to have $3 million to $4 million for future rounds, at least. And if it's a company that's really succeeding, and needs big money for expansion, then we would participate in that too. I would say that more than 50 percent of the fund is dedicated to follow-on investments.
For the lifecycle fund it's harder to say, because if we put $100,000, then the A round is 10 times more. There's no instance, I think, in which we have seen a valuation greater than about than $7 million or $8 million in an A round that we participated in pre-money, and so you can kind of figure it out from there. Usually we like to see an A round at a lower valuation than that. Maybe even much lower.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
NG: We generally come in on the lifecycle venturing. I would say that 70 percent of our investments, now, are like that. And 30 percent are that we invested in an A round, or even a B round.
VN: In a typical year how many startups do you invest in?
NG: Probably one lifecycle, per partner, per year. We have five partners at the moment, so five lifeycles and, of those, maybe three graduate.
If you include follow-on rounds, and we have quite a large number of companies in our portfolio, then obviously it's much more active. Let's say there are effectively three A round investments a year, maybe four, and something in the neighbor of five or six lifecycle investments a year.
Lifecycle takes more work. Lifecycle is the most work intensive part of our investing, because you have to help the company figure out their business plan, and build the team and go out and help them find funding with other VCs and to join a syndicate, and all that.
VN: Is there anything else you think I should know about you or the firm?
NG: We're really nice guys. I think one thing that characterizes us, and this is not true of all VCs, and I can promise you that that’s the case, we are trying to be very straightforward with our entrepreneurs. If we think they can't be CEO long-term we will tell them that right upfront. I think there's a lot of VCs out there who don't feel the need to do that, and they may be right. From a pure financial standpoint it may be better not to tell somebody, because you may want to get into a company then fire the CEO and bring in somebody experienced. But we wouldn't do it if we didn't tell them. It's just our nature. I think we're a very entrepreneur friendly firm. In my view, if we think the entrepreneur is way out to lunch on valuation, or something like that, we'll also tell them that and fight to get the valuation down. On the whole I think we're very friendly.
There was an instance of a company where there was a very early stage invention and the entrepreneur wanted to go out and raise lots of money so they could build their own laboratories, and begin heavy duty independent work, and we absolutely, flat out convinced him that was not the right way to go, and that the right thing to do was to stay inside the university, and use the facilities at the university to continue take it to the point where there was a prototype. We were pretty adamant about that and I suppose there are those who would have thought that we were being unfriendly, but it was the right the thing to do. And it likely saved the company.
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Claremont Creek Ventures is a venture capital firm investing in early stage information technology companies. Our investment professionals are experienced managers and proven venture investors. Our team shares a deep commitment to helping entrepreneurs build successful companies from the ground up. We focus on IT sectors where we have deep domain expertise, including – but not limited to – energy efficiency, IT healthcare, sensor based systems and security markets.
Claremont Creek Ventures is based in the East Bay. It is the premier funding source for early stage technology opportunities in the local area. We strive to reach a wider population of entrepreneurs – from Silicon Valley to the East Bay Area and beyond. Our East Bay location allows us to work closely alongside a strong entrepreneurial community and excellent research-driven "incubating institutions", such as UC Berkeley, UC Davis and the Lawrence Livermore and Berkeley Laboratories.