Kim founded Formation 8 and was previously a General Partner at Khosla VenturesRead more...
Scheinman has invested in SentinelOne, Zoom, Kodiak Data, Tango and Testim.io
Editor's note: Our Post Seed VC event is coming up on Dec. 1 in San Francisco. We'll have Chamath Palihapitiya (Founder of Social Capital), Aydin Senkut (Felicis), Jeff Lawson (Founder & CEO, Twilio) and more. Check out the full lineup and register for tickets before they jump! Post Seed is brought to you by Vator, Bullpen Capital, and Haystack.
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.
Dan Scheinman is an angel investor.
Scheinman has been an angel investor since 2011. During that time, he has tried to invest in early stage transformational technology companies, run by mature teams targeting large markets.
Since 2011, Scheinman has been a part of Arista Networks (ANET) where he remains on the Board of Directors, as well as ThinkBig Analytics, TomFoolery, Zoom Video Communications, SentinelOne, Treasure Data, Greenwave Systems, Imubit, Testim.io, San Francisco Giants, Reveal Imaging, Kodiak Data, Tango.me and ncyrptedcloud.
VatorNews: What is your investment philosophy or methodology?
Dan Scheinman: A couple of things that are strongly held tenants of mine: first is that I like experience. I'm a big fan of experienced founders and what I find is that it means that there's less likelihood of founder drama, which is one the biggest drags on early-stage VCs. Some percentage, I don't know what, of inexperienced founders end up in founder drama and, with experienced teams, hopefully people have worked together before and that you see it less. So far, my experience has been that I've seen less of that. So that's one thing.
The second thing is that I want companies that have a chance to be disruptive, which everybody wants, and so I like to look either in spaces that are out of favor, or teams that are passionate but are in a space where people think the market is already done. I've had a lot of luck finding those kinds of teams.
The reality is, when you're an angel investor, when you're investing early, your odds of success, obviously, are less, because you have less evidence. So, the way that you do well is you have to have some things do really, really well to make up for the ones that don't. In order to have things do well, you've gotta look for things for that are disruptive. In general, I think a lot of the professional investors and the professional funds are all over some of the spaces and some of the players that exist. If you just copycat those strategies, you're going to end up, over time, with lesser returns. Assuming that the VC world is relatively efficient, and that the best teams wind up in some of the best places, it means that if you just copycat that strategy you're not going to do well, so you have to look for something different.
VN: What do you like to invest in? What are your categories of interest?
DS: Macro-wise I tend to be still a cloud and enterprise technology person, so I like that space. I realized I'm not a consumer investor. I don't know as much about consumer. I've done some things in there, but I'm not a consumer investor. I've also not really been a healthcare investor.
Right now, in the enterprise, we are in the middle of a 30 year transition from client server to cloud. The buying patterns are changing, the role of IT is changing, the role of the infrastructure if going to change dramatically. I think that there's going to be new companies that emerge across various parts of the enterprise ecosystem that are really going to change the landscape.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
DS: I'm in a company, SentinelOne, which is an endpoint security company. They were the last endpoint company to enter the market, and it looked like, what did the world need another endpoint security company for? They were the only one that had solved the platform problem, and created a real platform to both find, detect and remediate malware across multiple platforms. That said to me, 'Ok, we have a disruptive opportunity here. And none of the other companies are looking at the problem in as much of a broad and deep way as these guys are.'
Zoom was in a marketspace where people thought video conferencing was over, and they didn't realize that the cloud was really going to reshape how that industry worked.
Those kinds of things I like, and, when they work, they provide the ability for me to the next set of investments that I make.
One of the most recent companies I just invested in is a company that does testing, Testim.io. So it allows enterprise apps to be tested before they're released into the wild, using software as opposed to people. It's the theme of automation, it's the theme of machine learning. These guys had solved the problem at their previous company and they said, 'Gee, this is a product that everybody uses,' so they went out to try and go do that.
I'm also in a company that detects and automates regarding advanced process control. They're using machine learning and artificial intelligence to figure out how machines should run, and then they apply the rules that are optimized for the businesses and to make sure the machine is running the right way. The name of that company is Imubit, and they're brilliant guys.
I also invested early in a big data company, Kodiak Data. The hype for big data was down, but maybe the reality was more mixed. Some of my friends were doing a big data infrastructure company that allowed enterprises to create big data pools to allow them to both test their big data projects and then run on existing infrastructure. I got really excited by that because every big data company needs this.
They're launching their SaaS platform as we speak. It has been really well received by customers because they said, 'This is exactly what we need to make the world safe for big data, because before we didn’t know how much infrastructure to devote to any of these projects,' and you can't go buy separate infrastructure for each project, you'd go bankrupt.
These are the kind of things that are there, that get me really excited and interested, because it's stuff that can really change and bring enormous benefit to the average user in the enterprise.
VN: What do you look for in companies that you put money in? What are the most important qualities?
DS: There are three things that are super important to me. First, I really want to see very strong market knowledge. By that I mean competitive knowledge. I hate the pitch, 'We're the only ones who do X. I'm the only networking company here,’ and there's 87 networking companies. I'm shocked at the amount of times I encounter incomplete market knowledge. I just had a meeting with a company where I loved the CEO but the competitive knowledge was mixed.
The second thing that's really important for me is, building a product is really half the battle. The other battle is how's it going to reach the customer? What's your route to market? One of the things that companies have gotten better at, five years ago they would gloss over the route to market. It was the fifteenth slide in a 15 slide presentation. People have come to realize, 'Hey, this is the whole ball of wax. We can build whatever but if no one knows about us we can't get it to customers. How does it all work?'
The third thing is, the reality is that I want people that I want to work with. If you don't like people when you're in the courtship process you're not going to like them any better when you get married and find all their flaws and foibles. It's really important to be that I work with people that I can see myself eating lunch with or having dinner with and that I can trust, and who match my cultural and ethical beliefs. It's important that you do the right thing and you treat people the right way.
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?
DS: Generally it's too early and, in fact, a lot of times people get sidewaysed trying to get early traction. So, my view is what you really want to do early is, it's the one time you're in engineering paradise, where you really don't have customers and you can build a product that is without compromise. You're building your ideal product, which we'll call MVP, minimum viable product, but you hope that you get it right because once you launch into the market, customers are going to start making demands and they're going to want things and everything gets more muddled.
In some ways I look for less metrics early on and a clearer vision of what they want to go build, because the one time you're going to have that pristine ability to build is in that first year or so.
There's times when metrics really are useful, but there's times when they can be really misleading and I've seen companies that have had $100,000 in ARR and they never get past that because they built a product for one customer. They didn't build something for the market. They were so concerned about the $100,000 ARR that they missed the opportunity.
So, I am not a metrics guy early on. If there are metrics, great, but I'm more concerned about making sure the clarity of vision is there.
VN: How long does it take before you meet a startup and make an investment and how do you conduct your due diligence?
DS: It's the craziest thing: on the good companies, too long! On the bad companies, too short!
The truth is that I try to make decisions within 30 days. Where I've made mistakes is either where I cheat on the process, and rely on others due diligence, or where I drag things out too long because, 'Oh my god, the sky could be falling.'
I try always to be direct. I go back in the nicest possible way and say, 'Hey, here's why I'm not investing, here's my concern, let's keep in touch,' so that I always hopefully build relationships. Actually, some of my best referrals have come from companies where I didn't feel a connection, or it was the wrong thing for me, and they say, 'We like you, here's three other companies to take a look at.'
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?
DS: This is a super important question. One thing I left out, and I always look at in the founder, is someone who understands this question: 'What's it going to take to get enough money to get me through a B or a C round?' The founder of Zoom had this mapped out from the beginning and understood exactly what his milestones were for each of the rounds he took. He hit, or exceeded, all of those milestones and he raised all those rounds at better pricing than he anticipated. So, a clear plan on how you get through these things.
Generally, I see that seed rounds can be in two stages: you have a seed round, then a seed plus round, which I generally see being half a million to a million and a half, or two and a half million dollars. When you go above two or two and a half million dollars, you run the risk of scaring away the A round guys, but what you want to get to, at that point, are the metrics that prove you're ready for an A round. Those metrics are customer adoption, understanding of your route to market, product market fit, and a clear pipeline. Also revenue, you have to have some revenue at that point. What I see is companies doing one or two seed rounds and then hoping to have enough metrics to get to an A round.
VN: What are the attributes of a company getting a Series A?
DS: The A round, in my experience, has generally been all over the map these days. For me, it's the hardest round to get, because the A round funders have really consolidated in the last 20 years. You've seen a huge consolidation so that you now have these massive, successful, wonderful A round funds but there aren't as many of them.
There's conflict issues, because they're much more serious about conflicts now. In the old days, they might do two or three that were overlapping or close and they could rationalize things. Now they're actually serious about conflicts so that limits. The reality has been that they haven't expanded their partner base so there's only so many partners who can do so many deals.
So, I think the A round is super hard and I have relied both on traditional A round and non-traditional capital to get come in and fund the companies, where I've had conviction to getting to a B round. We've seen the rise of all of these microfunds, and some fantastic, incredible, wonderful microfunds that have come up in the last five or 10 years, and we haven't seen the shift at the A round as much yet and there's a lot of stress about a funnel really narrowing when you get into that A round.
That's the Series A crunch. I think it's real, and you just have a tremendous amount of companies. One of the big VCs told me, 'We really want our partners doing one, or at most two deals a year. We're seeing qualified, meaning someone refers us, someone that we know, on average one or two deal a day per partner.' So these funds are saying, 'no.' They have to. They're saying, 'no' to 260 companies, per partner, per year, and, 'yes' to one or two per partner per year. It's really hard to get to be that one or two.
The other thing that's happened is the A round are waiting later and later to reduce their risk. It used to be, if you have $100,000 ARR that might be an A round and a fundable metric. Now it's $100,000 in MRR, and now it may be, 'We want to look at who your customers are. Not just that you have some, but we want to know exactly. What industries are they in? And we want to make sure that everyone at the company wears socks,' or whatever. You have this increasing bar that's been raised and because these guys can be picky, that definitely changes the equation.
What you see happening now is the rise of non-traditional funding coming in and you're seeing, sometimes, Singaporeans, Chinese, Russians, though recently less Russians, and others and hedge funds and strategics are stepping in to fill that gap. So there's a hodgepodge of other money that keeps some of these companies going.
Quite frankly, with Zoom we relied on a Taiwanese investor who came in and did the A round because video conferencing wasn't an 'in space' at the time. At SentinelOne, we went to Tiger Global to do the A round because there had been 15 endpoint companies formed. It means you have to be very creative as to where that money can come from, and most likely you're going to hear, 'no,' from the top 10 to 15 funds.
The other thing for the entrepreneur is they're not competing with their competitor in the space; they're competing with drones, or healthcare or AI or ML or networking or anything. They've got to be better than everything else, not just their own competitor. It's never transparent what you're competing with, so you don't know.
I've found that getting an A round is hard. To be honest, the VCs have a hard job too because they're looking at so many teams, it's hard for them to filter. So the art of the exercise is always: keep going, and get to the next round. Then, at the B round, things are going to get easier because you have way more metrics, and it's very clear what's going on.
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?
DS: First of all, I'm scarred because I lived through 2000, so I tend to be more bubble-sensitive than others, because I lived through it once. I was at the most valuable company on the planet, Cisco, and then I watched it go from $84 a share to $9. We lost 90 percent in our market value over a very short period of time. I remember what that feels like. So I tend to be a little more bubble-sensitive than other folks.
We need to see exits at some point to know where valuations are at. The more exits we have, like Nutanix is a good thing for the market, because then it's clear what Nutanix's price is. It trades every day. After the lockup expires, we'll know what the valuation of the company really is. Twilio is another one. Having folks out there will help set valuation and make everything clear.
The reality is that I do feel that things did get frothy in terms of valuations. I felt in February, when the oil prices went down, and the market started to freeze, I could really feel a downdraft coming. And then oil stabilized, the market stabilized, valuations stabilized, or went up, and so we dodged a bullet, but I think it's clear it will happen at some point again, I'm just not smart enough to know when.
I don't know what it will be as dramatic as 2000, it may just correct. Ultimately, February ended up being a correction. Companies took money at 20 percent or 30 percent lower than what they wanted to, and we may have one of those again. I don't know. I'm not smart enough to know but, for all of us who survived 2000, it definitely scarred all of us, and we're definitely always keeping one eye over the shoulder looking for the bear.
VN: If we're in a bubble, how does that affect your investing?
DS: If I knew, I would stop investing and give myself time to get through that. I would say, 'No new companies,' and, to some extent, I made that guess in 2015 and I was wrong.
The reality is, for me, what I need to do know is, can these guys, if worse does come to worse and the market implodes, is their storage for these guys to get to the metrics they need to raise an A round even in a bad market? Could we do it? I ask that question all the time. Are we only selling to Silicon Valley companies that are inside the bubble? Are we able to reach outside companies? Where are our first customers going to come from? Who are they? And if this thing blows up, what do we do?
I try to ask the questions, I try to understand where people are at. On the other hand, if you get too Nostradamus-like, these things don't happen all the time. The reality is there's only been one tech bubble burst, and it was 2000, and it wad ugly. Now there have been cycles, but they were more normal. People took a break, valuations lowered, everything started again. Will there be cycles? Absolutely, 100 percent. I think we went through one in February. Will there be a big bubble burst? I don't know. I hope not, because it was painful last time. It's not fun.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
DS: I'm from here, in Silicon Valley. I grew up here in Burlingame, California. Oddly, a huge proportion of my high school class, a good number of them, went to Microsoft, and some of the early Microsoft VPs went to my high school.
I originally went to law school and I came back just because I saw an opportunity. I saw how technology was starting to change the world, and I joined Cisco in 1992, just 20 months after the public offering and it turned out that that was a great ride. I ended up doing a couple of things that were super important to me. One, I ended up running corporate development right after the bubble burst, so I ran acquisitions, investments and partnerships from 2001 to 2007, and then I went off and did an internal startup, where I got to manage engineers and salespeople. While the project didn't succeed, I learned a lot. I was basically given an MBA in how to run a project. My personal view has always been that it's better to be disruptor than the disrupted, much more fun to be on that side.
When I left Cisco, I went and tried to go figure out what I wanted to do. One of the things I realized was that, for me, it was going to be really difficult to go work for somebody else. It's really hard when you're senior in something; I had been an SVP in Cisco, and it was like, 'God, I've been really senior here, and I'm used to managing. To go back and be, 'Yes, boss' again would be a little tricky.' Also, I found that I'm really not a good committee member. I don't do well on committees and all that stuff. I think it just wasn't a match for me to go into an existing structure. Although I thought about and I looked at it, it was just not a good personality match.
I also wanted to prove that I could find good deals myself. It's been a lot of fun. The thesis I originally started with was that it was really hard if you were north of 35 to raise money in 2011. Meanwhile, I was looking at all of these north of 35 people who actually had constructive, good ideas. Just with a little bit of capital, and maybe some top-up capital, these guys really have an opportunity to do something transformative, and that's kind of fun. That was where my thesis was born.
I decided I didn't want to be a pinpoint, like only security or only this, because then you have all your risk concentrated in one place. Even if it makes diligence easier, or makes it more tricky if the market turns, or you're wrong. At Cisco I was always a generalist anyway, so I decided I wanted to be a generalist. I'm going to stick to looking at things and I want to be where the puck is going, and I want to be with great entrepreneurs. I want to be with people I love and generally that has worked.
Like anything else, there have been some things that succeeded, and some things that have challenges, but the reality has been, on balance, its done very well.
One of the first things I did was I got to work with the team at Arista Networks and they let me buy some shares and go on the board there and they didn't take any traditional venture capital, in the traditional sense of the word, but that has been a great experience, watching this company go from really teeny to now a billion dollar plus sales company. It's been crazy.
VN: What do you like best about being a VC? What makes you excited?
DS: What I love is being able to help my friends realize their dreams. This is a job where you're enabling your friends to be successful. If I can help my friends realize their dreams of building great companies, it makes me feel great. That's the best part for me.
I also like the fact that I can go home at night and I don't have to worry about meeting payroll. Being able to have some of the stress of operating is also healthy for me and healthy for the companies and it makes it fun so that you can give good advice and talk, but, ultimately, the CEO has to be the decision maker.
VN: What is the size of your current fund?
DS: I've had multiple offers to invest money on behalf of others, but, again, this idea that I didn't want to have a boss. So, currently it's pure my family capital.
I've tried to act like a VC and only do one to two deals per year, so you have the time to focus. I've tried to only do companies where I can add value, where my experience adds some value, because the one joy of being at Cisco is that it went from $40 million to $40 billion and there's rarely a business problem that I haven't seen before. So I hope to be able to help people as they go through things. Then my hope is that I can be useful in a strategic way and come up to the solutions to the problems they see. It's always generally the same set of problems, so the key is making sure we have all the options on the table, and making sure we go for the right options.
It's been a tremendous amount of fun and the satisfaction of occasionally saying, 'Hey, this worked! I was actually right!' is another really good thing.
VN: What is the investment range?
DS: My initial investment is easy: it's between $50,000 and $250,000. The follow-on question has been more complicated. To be honest, I don't have a clean answer. The answer is: sometimes.
I go back and forth on whether follow-on is the right or the wrong thing because sometimes I'm judging myself on my cash, or cash return, but on the other hand, yes, it's great to hold onto a certain percentage of the company. But sometimes I'd rather do new deals, rather than fund the old deals. I've been all over the map on that. Sometimes I do, sometimes I don't. A lot of it depends on the relationship with the entrepreneur. If I'm the lead then I kind of have to, and I do it, but when I'm not the lead I'm all over the map. That's the honest and true answer.
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?
DS: Generally I would say yes. The highest I've ever done is 50 percent of a round, once when I put $250,000 into a company. At least 10 percent is my goal of the seed round.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
DS: Post seed, or seed plus is what I call it, sometimes I do that, particularly if it's teams I don't know as well, and I just want to see how they perform. I've done that. I'm generally seed or seed plus, somewhere in there.
Series A is usually too expensive for me. I've been invited into a lot of Series A. In February, when things started to go down, I got invited to a lot of Series C, D, E, but it's too late for me. Taking a small piece of something that's much bigger doesn't excite me as much.
VN: In a typical year how many startups do you invest in?
DS: One to two a year.
VN: Is there anything else you think I should know about you or the firm?
DS: In my prior life I saw a company go from $40 million to $40 billion. You can say, 'Oh, it's a different industry or time,' but the reality is that you learn a lot when you see a company scale and you know what has to happen. So that's been a great experience.
I've also been part of a number of companies that are at, or near, billion dollar valuations as part of this process. I was an early investor in Tango, which got to about a $1.5 billion valuation. Zoom, which, if it ever were to see capital, would be in the billion range. It doesn't need any capital right now so it's not seeking capital. Arista is obviously now public and it's worth over $5 billion in terms of its valuation. A company down in LA called Greenwave is well along its way and SentinelOne is also heading in that direction. So, I've been part of a number of companies that are crossing the chasm, or have crossed the chasm, and gotten to significant valuation. My hit rate has been pretty good.
The thing that's me is that I will be there for the entrepreneur. I'm not going to write the check and say, 'Oh, hey, I'm in Aspen, see ya! Send me the proceeds when it happens!' That's not me. I want to be there and I want to be part of the team and I want to help people. I don't always know the answers but I can always help brainstorm the answers.
I've also had some early exits in my portfolio. There's a company called Think Big Analytics, which did very well. Teradata bought it. There's a company called Tomfoolery, which got sold to Yahoo for a good deal. So, I've been through some M&A, one IPO, maybe another one coming hopefully in the next year or two. I've gotten to see the whole lifecycle.
The other thing that I've seen is companies have six month delays in shipping, whose products weren't ready for prime time, and who had to adjust and figure out what to go do. So I don't panic when over these things. It's always, 'Ok, what's next? What are our options? What do we do? How do we handle it?'
So that's me and hopefully I can use my knowledge, history and connections to be useful to entrepreneurs.
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Joined Vator onDan Scheinman has been an angel investor since 2011 focusing on experienced teams, tackling big challenges in the enterprise. Prior to that, long run @Cisco Systems including SVP Corp Dev and running internal startup.