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Bhadra was most recently with Cisco’s Corporate Business Development team
There has been a big debate over the 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.
Sandeep Bhadra is a principal at Menlo Ventures.
Bhadra joined Menlo in 2015 and focuses on enterprise investments. Companies in the Menlo portfolio he is involved with include AppDome, Platform9, Signifyd, Unravel Data and Clarifai. He was most recently with Cisco’s Corporate Business Development team working on acquisitions and investments in cloud, enterprise infrastructure software, and big data/analytics.
Earlier, he was an engineer at Texas Instruments’ R&D unit – where he led projects to build an Openflow switch chip, an ultra low-power IoT mote and 4G/LTE small-cell networks.
Bhadra received a PhD from the University of Texas at Austin and a Bachelors degree from IIT Madras, both in Electrical Engineering, and an MBA from INSEAD. In his spare time, Sandeep likes to travel up and down the pacific coast with his dog, read fiction, and drink burgundies
VatorNews: What is your investment philosophy or methodology?
Sandeep Bhadra: We're a 42 year old firm, and we're investing out of twelfth fund right now, which is $400 million. Roughly half and half between early stage investing, which is Seed, Series A, and half in early growth or growth investing, which is B and C.
Our investment philosophy probably matches our peer group of firms on Sand Hill Road, which is that we want to be early partners in the journey with entrepreneurs who have tremendous insight and ability to execute in brand new markets that nobody understands right now. But the entrepreneur, through sheer experience, or through some other means, has this amazing insight and ability to execute against that opportunity. That's the person, or the team, that we want to back.
The reason we're constructed as multi-stage firm is because, sometimes, we aren't able to get into a company’s round at the Series A, just because it's not on our radar. Even if we missed out on the opportunity, we would like to be able to back such a tremendous entrepreneur at a later round. That's the firm's philosophy.
We are a small team and so, as a firm, we tend to focus on a few areas every year. Because we're a small team, we basically pick out six or seven categories on the market that seem interesting for us, and that we, as a firm, should lean in and invest against those opportunities. That's our methodology.
VN: What do you like to invest in? What are your categories of interest?
SB: I have colleagues who invest in consumer tech, marketplaces, in drones, and VR, on the one hand, but I spend most of my time in enterprise investments. There are three categories of companies that I'm super excited about. One is the shift to cloud computing and all that means for enterprise infrastructure in terms of managing and dealing with complex workloads that are moving from traditional data centers and servers to the cloud. What does it mean, and how can we help enterprises on that journey? It's a multibillion dollar category and huge companies are going to be formed there.
Two, I'm really interested in cyber security. I don't just mean it like, how do we protect the large Sony’s and Target’s from hacks, the large enterprises. I think, increasingly, cyber security is a problem that consumers in their homes will have to deal with. I think it's something that small and medium businesses will have to deal with. So, how do you democratize cyber security for a wider market? That's something I'm really interested in. How do you prevent a malware attack or a ransomware against a small or medium business with 10 or 20 people? They don't necessarily have a formal set of cyber security framework. I think that’s a tens of billions of dollars opportunity worldwide, and I'm fascinated by it.
The third area I'm interested in are applications that leverage data. Thanks to all this cloud infrastructure, the economics of storing and analyzing data is at an all-time low and it continues to plummet. Thanks to open source technology, managing and making sense of that data is increasingly available to almost any smart engineer start can go and download the right framework, or can start using the right APIs. I’m really interested in companies that are leveraging these massive data sets that are available across finance or healthcare or fraud and risk, or insurance, or wherever you go. How do you create the next generation of these industries? These companies won't look like AI companies or machine learning companies, but they will actually look like a financial firm, or they'll look like a risk firm, or they'll look like a healthcare firm. They will have this deep machine learning mechanism in the back that is completely changing the economics of the industry.
Those are three multibillion opportunities that I'm most excited about, and where I'm spending all my time.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
SB: Before Menlo, and I've been here for two years now, actually it is going to be exactly two years in like a week, I was at Cisco, investing out of their balance sheet and we made investments in truly amazing companies, like MapR, Moogsoft and Platfora. This was the early days of the big data revolution, where Hadoop was rapidly becoming mainstream, and MapR was taking Hadoop, which was essentially open source technology at the time, and hardening it and making it such that massive, large enterprises, especially financial firms and massive healthcare firms, could actually leverage everything Hadoop had to offer. MapR is a fantastic company and I'm truly proud to have been able to be part of that investment in the early days of my investment career at Cisco.
More recently, I helped source an investment in Signifyd, which I'm really excited about. We were just talking about my thesis for investing in companies which have to do with a big machine learning component, and which have proprietary access to data and the ability to analyze and create value out of that data. What Signifyd does is it's a simple API that tells e-commerce merchants whether a particular transaction is likely to be fraudulent or not. This is a huge pain in the neck for e-commerce merchants worldwide, and they employ schools of people to actually go and analyze each of these transactions, and they end up rejecting a lot of really good, high value transactions just because, looking at the transaction, it appears there might be a problem. It's very much done by hand and its based on feel rather than a highly quantified method. Signifyd has a simple API that makes it easy for any commerce merchant to go out and have peace of mind because, in case there is a fraudulent activity, Signifyd will stand behind that transaction and make the merchant whole. It's truly disruptive, not just in technology but also in the business model.
I'm super excited about this other company called Platform9. This is in the cloud infrastructure category. It was my first investment at Menlo. My partner Mark Siegel and I worked with the company, and we made the investment at a time when Openstack, which was the big open sourced cloud management technology, was just about to go mainstream. At the same time, new stuff, like containers, was just around the horizon. The entrepreneur, Sirish Raghuram, has this particular view that you can't sell cloud management software just as software, but you have to sell it as a SaaS service. What that means is that a typical enterprise finds it hugely painful to manage a distributed system, like Openstack or Kubernetes on their own, so just bundling it up, and shrinking wrapping software, and selling that to enterprises is not useful, because then you're actually not helping your customer. You are, effectively, selling them a white elephant. Instead, it would be much better if you could continue to manage and operate that distributed system for your enterprise customer remotely. Platform9 has figured out an amazing, high scale way of being able to manage this cloud infrastructure at scale. The company has landed blue-chip customers over the past 16 to 17 months that we've been co-investors.
To me, my definition of a top investment is not just a great entrepreneur, with an amazing niche or wedge or insight in the market, but also just watching entrepreneurs mature as their companies grow -- understanding that now is the time to scale sales and marketing, now is the time to think about partnerships. Just watching entrepreneurs go up the maturity curve, from becoming product guys to becoming sales execution machines, to becoming general managers of their businesses. That's a wonderful trajectory to be able to track. That's the case with each of these three companies, so I'm super excited to have been a part of these companies.
VN: What do you look for in companies that you put money in? What are the most important qualities?
SB: A veteran investor told me, I think two months into my investment career, "For early stage investments, there are four things you need to look at: team, team, market and team."
We definitely look at the market, or at least we look at the market from the founder's perspective. The market might be small today, or it might not be well understood today, but the founder has the magic crystal ball, and they can sort of bring you in and let you take a glimpse at how he or she sees that this inevitable market will unfold. I think that that sort of vision is amazing, like it gives you goosebumps.
Personally, I'm an engineer, so I skew towards founders who have some unique tactical brilliance because, typically, in these early markets, you need that special, technical brilliance so that you can attract the best and brightest in the industry category for your company. The recruiting magnetism is probably the number one thing I look for. Founders like that are not just able to recruit people into their companies, but they're able to recruit champions in the enterprises that they sell to, or they are able to recruit champions at partners when they're doing business development. They're even able to recruit champions when they go in and find the next round of funding. That recruiting magnetism is key at the early stage where you have to be the hands on person, but you also have to able to infect other people with that excitement for what you’re doing.
It doesn’t have to be a technical background. I think it helps in many of the areas I invest in, but it can be brilliance just in understanding the market. I'll go back to the crystal ball analogy. The ability to analyze and dissect market and find a wedge there, and find an opportunity there, that's probably the most exciting thing.
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?
SB: To be honest with you, it's totally a function of the industry and the market. In many cases in enterprise software, you actually don't necessarily have paying customers at the Series A or at the seed, but you have people who have are passionate users of the technology. You've given your software, or you left your product with a customer for the pilot, and then your customer is asking you, "Hey, when can we change this from a pilot to purchase order?" We have definitely done Series A investments like that, and will continue to do so in categories where it's not possible to have a proven product market fit at the early stage.
At the same time, you can have companies which are like an API for something, SaaS model, where getting the prototype up and running can be done for as little as $200,000, or half a million dollars, by a couple of people. Then you certainly are, by a Series A, looking for early product market fit because you know that while no one customer is going to pay half a million dollars for this, there are a bunch of customers who are interested in paying $30,000 or $40,000 for it. I would say it depends on the purchase order size for enterprise investments.
I would say early product market fit, and by that, whether customers, or whoever is using the product, feels that same resonance as the startup is important. "Hey, this is early, but the insights that the founder has shared with you, Mr. Investor, is the same insight we have independently come to a conclusion as customers on our end. We were kind of out in the desert, looking for a company that would solve this problem."
VN: How long does it take before you meet a startup and make an investment and how do you conduct your due diligence?
SB: I am biased in the sense that I like to meet companies off-cycle. My favorite thing is to meet companies four or five months after they've raised their seed round or their Series A, and just build a relationship with the founder, understand the business from their standpoint. Just have a meeting, set up a hello, and then go back and do my homework. I make sure that, by the time the company is ready to raise, I have built up enough conviction that I can tell them at the first meeting when they're ready to raise if we're interested or not. That's my process.
In the second case, in which I'll get a note from a colleague who is also an investor at another firm, who will say, "Hey, one of my portfolio companies is raising right now if you want to take a look." In that case, as a firm, we try to be very timely. I think we set ourselves to a two week decision process to say no. In the sense that we'll meet the company and then we'll go back and do some preliminary homework. Usually by next week, or the week after that, we'll let you know whether we're going to dig in deeper or not. If we do dig in deeper, which means that we'll do all the work as a firm to prepare for a full partnership meeting, we'll typically spend another week or 9 or 10 days, depending on references and other things. Once we have a partnership meeting, we will make a decision after the entrepreneurs have left the room in about 30 to 40 minutes. All the work ahead of it is to prepare a memo and to make sure the investment teams understand what the pros and cons of the investment are -- where the risk is, where the greed is and where the fear is with every investment. We will typically let the entrepreneur know that evening or the evening after what our terms of engagement are. We try to be really efficient with this process.
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?
SB: I don't care what the round is named. All that I would look for is how much capital have you raised and has the team made good use of that capital to prove early product market fit? We've seen Series As where the founders have not even raised any capital but have each pulled in $50,000 on their own, or from friends and family, and have basically raised $150,000. They've proved something, but it's super early, so they're raising a $4 million or $5 million Series A and we're absolutely excited and interested to be a part of that round. That's one use case.
If you raise a $4 million seed, or I've actually seen a company recently that has raised $6 million between pre-seed and seed, of course I would treat it as a Series B company no matter what it's called in terms of traction, because you want to see that the company has gotten far along with that progress.
VN: What are the attributes of a company getting a Series A?
SB: Our focus is primarily on Series A. For seed where I have invested, and this true for any company I advise, I want them to think of this round of capital as last round you need to raise. I know it sounds stupid at the seed and the Series A because you know that a lot of capital has to be spent to build upon the product before you can take it to market, but good entrepreneurs will figure out ways to in get customers in advance, and to prepare them to say, "Hey, look, we'll have this product ready in July, in the summer, and, by the way, lets get all of this done so that, come July, we'll have this product GA’d, and by September you should be ready with a purchase order." My advice to seed companies that are raising a Series A is: have a finished product ready, not just the technology but it should be a product, and, in the enterprise, have four or five customers who will really speak to that absolute need for this product category.
The best Series As are where the Series A investor sits across from the founder and says, "Oh shit, these guys can create an entire market category." That's the founder's feedback at the seed stage. We want them to be able to demonstrate, or at least be able to talk, confidently about being able to demonstrate these early resonances with their customers. For SaaS companies there's regular metrics; you need to have $2 million in ARR, or whatever the current number is. But we invest in companies that are not SaaS as well, and the numbers can change.
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?
SB: I personally do think we’re in a bubble. I guess we're in the down ramp phase of the bubble. We're ramping down, which is a good thing. It is true that growth is hard to find in the public markets, so a lot of institutional investors are piling into late stage venture investing, and that's been going on for the last two to three years.
I think 2017 is going to be great because, on the one hand, you will see a lot of really good companies go out and IPO. On the other hand, you will see a lot of these companies, which have needlessly taken up our attention and capital, find a home for themselves. Many of these are good businesses, but it's the great businesses that will be able to raise yet another round based on future inflated expectations, and the good businesses will find good homes at good companies through M&A or private equity buyouts. That's actually a good thing for the entire venture ecosystem, because good teams, and good people, will be back in circulation looking to do the next thing. Entreprenuers find it easier to both raise capital, and then use that capital efficiently, to find customers, to find amazing people to join their teams, when there is not a lot of froth and distraction out in the market.
VN: If we're in a bubble, how does that affect your investing?
SB: To be honest, it doesn't really play into our dealmaking decision process at Series A. I will tell you that when we were at the peak of the bubble, because companies found it easy to raise massive Series Bs and Series Cs, like a $25 million or $30 million Series B was par for the course, that pressure trickled down to the Series A as well.
In many cases there are two mechanisms that were happening simultaneously. One is -- thanks to the cloud, thanks to the distribution efficiency of the Internet and mobile, it's easier for companies to show amazing traction even on a million dollars, or half million dollars, of seed funding raised. When some of those amazing companies come in, you feel comfortable writing a $10 million Series A check. That's happened. Also, you know that, because there is so much private capital flooding the market in the later stage, you feel very confident that these companies will be able to go on and keep the momentum and have a significant markup at the Series B and the Series C. That's a good story. But what also happens, inevitably, is that there are a lot of mediocre companies who still feel like they can go out and raise a $10 million or $12 million Series A, and that happened a lot in the early part of 2015.
I guess we were more cautious and disciplined as a firm and we certainly felt bad for missing out on some opportunities, because the number one fear that an investor has is the fear of missing out of an amazing opportunity, but we stayed disciplined, and while we missed good companies during that period, we're also pretty glad not have been swept up by the hype and invested at some of those companies at that stage. I think we're definitely seeing the Series A round sizes come back to normal $10 million, $8 million Series As. It had become part of expectations in 2015 that every company needs to raise a $10 million- $15 million Series A. That expectation is no longer there and I'm obviously happy to see that
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
SB: I fell into VC by accident. I think that's true for most people who are in venture.
I'm an engineer by training. I went to undergrad at IIT in India, graduated with a degree in electrical engineering. I worked for a few months at one one of India's first private Internet search providers, helping them build out WiFi services across a few cities in India. I moved to the States and, through an interesting set of circumstances, wound up publishing extensively and up wound up with a PhD from the University of Texas at Austin.
While in grad school, I always knew that I did not want to be in academia, and I definitely wanted to apply research that I was doing. I was fortunate enough to work with really smart people at the IBM TJ Watson Research Center and Bell Labs during grad school and I met the team at Texas Instruments who were building at the time, protocols for LTE-Advanced, which are the wireless communication protocols that our phones use. There were a bunch of projects there that were a direct application for what I was doing in my research in school and it was super fulfilling to be able to do that for a couple of years.
After that, I helped start one of the first software-defined networking chip projects out of Texas Instruments; that team has since spun out and is an independent company. Now, I felt I knew how to design products, be a product but I wanted to understand why do some businesses work and others fail? I found that the best way to do it was for me to just understand the basics of finance and marketing and sales and then apply it. I went to business school for a year, a one-year program to minimize opportunity costs, as opposed to a two-year MBA program. When I came back I thought of joining this startup that was spinning out of my previous group at Texas Instruments, but, through a random set of occurrences, I met the investments and corporate development team while I was visiting Wharton at Philadelphia. I interviewed there and ended up in the corp dev team at Cisco. Cisco has a $40 billion balance sheet. It has always grown through M&A and through making strategic investments, and I found it was an amazing place for me to sit and learn how strategy works with some skin in the game as an investor, as an acquirer of companies. I did that for a couple of years and it was an amazing learning curve.
I randomly met the current team at Menlo again through coincidence, and through talking about deals with them, and they asked me, "Do you want to spend more time doing investments?" I said, "Yeah, absolutely." And that's how I got into it.
VN: What do you like best about being a VC? What makes you excited?
SB: The reason I like early stage venture is because you have the nebulous formation risk that an entrepreneur gets to experience, but, at the same time, it's a high-throughput way of doing it. I guess you could say that I like to do five things at once, instead of doing one thing at a time, and, so, venture is way for me to participate in entrepreneurship in a "Let's run five experiments at a time" way.
VN: What is the size of your current fund?
SB: $400 million
VN: What is the investment range?
SB: It varies, to be honest. We're probably comparable to any of our peer firms in terms of check size at the seed or Series A, or even in later rounds.
We've seed rounds of $100,000 and we've done seed rounds at $2 million. In our seed investing, we have consciously been writing larger checks with bigger conviction, because we feel like we want to be involved, irrespective of whatever stage the company is at. So, even for early stage investments, we prefer to write larger checks than smaller.
Our Series A check sized are anywhere between $7 million to $10 million. $7 million or $8 million is probably the sweet spot for Series 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?
SB: For seed, there's no ownership requirement. Our interest in doing a seed investment is to build an early relationship, and to be able to support a founder at the very early stages, with the view of definitely being in interested moving on to Series A, in many cases.
We are firm believers in the power law of venture returns. If you believe in the power law of venture returns, you want to make sure that you invest in a company with the knowledge that this investment could be the one that returns the entire fund. The way we look at a Series A company is we ask ourselves, "Could this be a company that could return us four hundred million dollars, our fund size? For the amount we invest in it. If everything goes right, and if the magic crystal ball that the entrepreneur is showing us is exactly how the story unfolds, can this be the investment that returns the entire fund?" We ask ourselves that and then we work backwards from there in terms of ownership at the Series A.
VN: Where is the firm currently in the investing cycle of its current fund?
SB: We started investing out of this current fund shortly after I joined in early 2015. I would say we're investing at a good pace, and we're midway through our investment on this fund.
VN: What percentage of your fund is set aside for follow-on capital?
SB: Of course we set aside reserves for investments. The companies that we invest in are typically companies that figure out ways to continue to execute very well and, when they raise subsequent rounds of funding, we absolutely like to do our pro rata. In fact, in some cases, we will try to pile more capital in. Towards that, last year the partnership raised a $250 million special opportunity fund, which is a vehicle to invest larger checks, many times, in existing winners from our early stage portfolio.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
SB: We do have a Menlo seed fund, but our focus is on Series A.
VN: In a typical year how many startups do you invest in?
SB: I aim to do two to three investments a year, I think that's the pace. Typically it's a mix of earlier stage Series A or B companies, and perhaps one seed deal. I think that's the best way to think about it.
The firm probably does about 10 investments a year, of which about 50 percent will be Series As, and we'll do a few seed deals as well, probably seven to eight seed deals.
VN: Is there anything else you think I should know about you or the firm?
SB: We're obviously looking forward to investing in new markets, there's a lot of exciting stuff that's happening across the board. I guess it's what we'd call frontier tech. Either applications of AI and things like robotics or genomics. I think a lot of interesting stuff is happening right now and, as a firm, we're very interested in figuring out ways we can be involved with entrepreneurs, while solving some of these big problems.
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