The Games Fund is a Moscow-based $50 million early stage fund that launched last weekRead more...
The firm invests exclusively in the Texas ecosystem
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed!
While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Krishna Srinivasan is Founding General Partner at LiveOak Venture Partners.
Srinivasan has been investing in early stage Texas based companies and entrepreneurs since 2000. His current board involvements at LiveOak include CS Disco, Digital Pharmacist, Hive9, Iris Plans, Ojo Labs, Opcity (acquired by Newscorp), Razberi Technologies, Rollick, StackEngine (acquired by Oracle) and Telestax.
Prior to co-founding LiveOak, he was a Partner at Austin Ventures, where he worked with companies focused on Enterprise Solutions (Augmentix, Entorian – NASDAQ: ENTN, Caringo) and Wireless (Spatial Wireless – NASDAQ: ALU, Mavenir Systems (NYSE: MVNR), Black Sand Technologies). Prior to joining Austin Ventures, Krishna was with Motorola where he wrote large scale optimization software for supply chain planning and worked with a variety of business units on strategic and operational issues. He started his professional career at SEMATECH.
Srinivasan received his MBA from Wharton where he graduated with highest academic honors as a Palmer Scholar. He also has an MS in Operations Research from the University of Texas at Austin, and a BS in Mechanical Engineering from the Indian Institute of Technology, where he graduated with the highest all-round honors. Krishna is one of the founding members and previously served as a board member of TiE Austin and currently serves as Chairman of the Miracle Foundation board, an Austin-based organization that supports orphanages in India. Specialties: Venture Investments -- seed, early and expansion stages.
VatorNews: What is your investment philosophy or methodology?
Krishna Srinivasan: Our overall investment philosophy and strategy is to be manically focused on the strategy of building world class category winners coming out of Texas in a capital efficient fashion. That is the middle of the fairway strategy for us and that’s worked really well for us in Fund I, and that’s very much out investment philosophy as we take it forward.
A different way of thinking about our investment philosophy is to focus on four things: one, we are first institutional investors in Texas-based tech and tech-enabled service companies; two, we are full life cycle investors, so we're investing $1.5 to $4 million for a first check and then up $10 million for the full life cycle; three, we are active investors, so we typically lead or co-lead all investments and take board seats all the time; fourth, it’s an entrepreneur-driven strategy as opposed to a segment-heavy strategy, so we adapt to what the entrepreneur needs and we plan an active role in the company building process and back the best entrepreneurs that come out of Texas.
VN: How is the ecosystem in Texas evolving?
KS: In this business, we are all heavily team-driven and talent-driven and we are seeing a spectacular surge of high quality talent here in this market. Talent that’s better than ever before and that’s because of everything from migration of talent from other parts of the country and also talent that’s been through enough cycles of interesting companies, so there’s a real maturation of talent here in this market. Talent here is simply the best we have seen in the two decades of investing we’ve done. Texas is, in general, red hot with respect to activity and quality of talent available for us.
Second, we require capital. Obviously, there are early stage guys like us who are there to be the first money in high quality companies, but we’re also getting a lot of attention from bigger check writers from all over the country, all over the world, and there is money required to go full life cycle. So, for us, more venture firms coming into town a very welcome phenomenon. We always like to be collaborative and work with folks, so, overall, there is increasingly pretty strong capital availability for taking companies all the way here.
The last part is you’re really seeing some segments where there’s really impressive world class activity. Texas, historically, has been very strong in enterprise and B2B and it’s overall just much more diversified than in 2000. Some of the leaders in the portfolio, for example, are vertical players; we’ve got CS Disco in legaltech, we’ve got Ojo in real estate, we’ve got Digital Pharmacist in healthtech.
This is what gets us excited: the critical amount of talent that has real depth of expertise in specific segments and there is plenty of capital to join us, to follow us on deals going forward makes for a pretty robust, vibrant ecosystem that we can capitalize on.
VN: What are your categories of interest?
KS: We are intentionally very segment agnostic. That’s how I would categorize us. It’s very hard to be geographically focused, which is what we are first and foremost, and state that, “These are the segments we’ll invest in.” We’re all about mapping the entrepreneurs and following great entrepreneurs and backing them to build great companies. So, I just gave you examples of vertical industries that have exciting companies; we have done one in fintech, we have done one in automotive tech called Rollick, we have done another real estate tech company in Fund II. So, there are a lot of places where industry/domain meets tech, I would say that is definitely a strength of the Texas market.
The boards I'm on are all companies are a variety of enterprise, vertical software type companies, and that is, for the most part, what we invest in. Having said that, we would definitely invest in consumer tech and CPG tech too, it’s just that we don’t see quite the volume of activity in those places like the other categories. If it starts to pick up more velocity, if there's more activity in that, I can totally see us having more companies in the fund in those areas of opportunity as well.
We follow the entrepreneur, and we're a good partner to them, and, in general, we’ll be guided by where there is mission critical activity available, or real density of activity, which will be based on where there is talent already in this market. It’s a little bit different compared to how national investors view it, where they cast a nationwide net that finds specific things they want to invest in. We are so heavily people-driven in our approach, it still ends up in the same spot, where our portfolio looks like it might be, but it’s just that I can’t start saying, “I want to be in a legaltech play” because we might not find a legaltech play for the next few years.
VN: What is the size of your current fund and how many investments do you typically make in a year?
KS: In Fund I we said we’d invest in 15 to 17 companies, and we ended up with 18 companies. I anticipate that Fund II, which is the same size, will also to be about 18 companies. In a typical year we will invest in four to six, maybe a bit more, but four companies in a year is what we would anticipate, so overall about 17 to 20 companies in this fund.
VN: What stage/series do you invest in and how much is that in dollar amount for you?
KS: We invest in companies that, today, would label themselves either series seed or Series A stage investing. We’ve invested in pre-revenue companies, we’ve invested in companies which are some level early product market fit. If it’s a very experienced entrepreneur, we’re willing to take the super early risk, and even be in a pre-revenue business. I would say already in Fund II about half the companies are pre-revenue and half the companies have revenues. If people are really inexperienced maybe we look for more revenue traction before we invest in them. So, you put that all together, we are first institutional investors in series seed and Series A stage companies.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
KS: We don’t have such formula guidelines at all.
VN: What other signals do you look for? Team, product, macro market?
KS: First and foremost is the founding team. If you look at where things have worked for us, it’s either been repeat entrepreneurs, who are been there, done that, or they come out out of the industry that they’re trying to disrupt with some experience, they have a lot of insight into the industry and they have a strong point of view on the industry and its trends.
Number two, these are people who are acting as a strong correlation between people who are, for lack of a better word, authentic, who have intellectual honestly, just with respect to what they know and what they don’t know. Authentic for us means are these people what they say they are? Are they what they say the opportunity is? This is a business of triangulation, and, so, first, second, third meeting is it all lining up? So many of these businesses are super early stage and so many of the best people we back say, “I don’t know” to questions to we might ask. We put into that a high degree of authenticity. The best guys have a mechanism of saying what they don’t know. Also, we have very direct conversations in terms of, “What are we truly trying to derisk in the company, in what sequence, with this capital?” They should not be saying everything is desrisked, everything is known, but come at this with a well point of view and perspective on what we are trying to address and tackle as we take it forward.
Lastly, they’re people who obviously we want to work with and, very importantly, they want to be collaborative and want to to work with us. There have been a lot of people who have been great entrepreneurs who have said, “I don’t want to actually collaborate with somebody, I just want to see you as a source of money and nothing else." I think we are very collaborative with people and we like people who share that value system like us, in terms of company building.
VN: What do you think about valuations these days? What's a typical Seed pre-money valuation and Series A?
KS: Everything has got a valuation; almost all investments are priced rounds when we invest in them. Like everywhere else, there’s been an uptick in valuations but Texas, given that there’s not as much capital as in the Bay Area, there’s definitely a slight discount to national valuation trends.
You can't valuate just one side of the coin; the other side of the coin is how much is the company trying to raise? Companies in Texas are, in general, much more capital efficient, they get farther on a certain amount of money raised, and, as a result, it all balances out. If you can go further with a smaller amount of capital, and even if the you have a slightly lower valuation compared to your national counterparts, you can end up selling a smaller amount of company to get to same, or even further, milestones. We see that a lot in Texas companies.
VN: Does money go further in Texas just because it’s cheaper to live there, cheaper rent space, etc?
KS: It’s not only that; you also that when there’s a lot of capital in a company, you try to solve a lot of problems in parallel, and, often you do it in a sub-optimal, inefficient fashion. We might, in the spirit of doing things a little more capital efficiently, sequence or serialize the list of unknowns and problems you’re trying to solve. As a result, companies are almost capital efficient by construction. So, a small part of it is the lower cost of living, but the bigger part of it is the lower capital availability also implies you’re more disciplined in terms of the investments you make while you scale the business, and that naturally leads to a more capital efficient company.
We definitely have a strong perspective on capital efficiency, that we want companies to be capital efficient, since it’s good for us, it’s good for the founders, it’s good for the team, to get further on a finite amount of capital. I think it’s very healthy, especially during bad times; the more capital efficient you are, you’re not reliant on big sources of financing to get farther. So, I would definitely say we put our finger on the scale towards helping an entrepreneur think about building a business more capital efficiently. That means, don’t try to wage battles on too many fronts. If we are churning customers, then don’t expand sales and marketing yet; be more disciplined about tacking the churn problem first before you expand your sales team. Just things like that, which all drive toward having a more capital efficient business as we take it forward.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
KS: Raising a fund is always competitive; the fund has over 90 percent institutional investors who can invest all over the world. We’ve got world class, top notch LPs in the fund and the reason they want to invest in LiveOak, as compared to others they have access to everywhere else, is because, number one, we have a unique team that’s now in its twentieth year of executing the same strategy successfully. The same strategy of investing in early stage, Texas-based tech companies; it’s a team that’s done this through multiple economic cycles, from the Internet bubble to the current bubble. It’s a team that’s now worked together on 41 companies have we have lead or co-lead investments in, and it’s a team that’s now had $2 billion of enterprise value in exits. Som we can point out to LPs that it’s a team that’s been stable, that’s worked together for a long time, first at Austin Ventures and now at LiveOak, and it’s not our twentieth year of working together. That resonates extremely well with any LP that we talk to.
Number two, rather than cast a wide net and fish in very competitive ponds, like in the Bay Area, we are highly focused on a strong, local market, where we are kind of a big fish in this pond. We play a dominant role in Texas, and we make the case that Texas is a great market, second largest in terms of technology and talent. There are great universities putting out strong STEM graduates, so the Texas market is robust. In this market, we are the VCs with the strongest experience, duration and network to build great companies.
Number three, we have optimized an investing model that works well here; we’ve got access to talent like nobody else in this market. We talked about our big emphasis on capital efficiency, and we know how to influence that as a board member and an investor in these companies.
Another part is we’ve got a big emphasis on building real businesses. We are not here just to figure out how to flip a business in a sale. If you take a look at the portfolio in aggregate for Fund I, the aggregate revenue has grown 10 fold from the time we invested in these businesses and we’ve gone and raised over five times the capital that we invested from others in this time period. We broadly make the case that, not only are we saying that we have a good team in a great market with our investment model, but already, in five years, it’s delivering real results of this kind, and that’s how make the case to LPs.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
KS: As a firm, we’ve been around for a long time, we’ve invested through cycles, we are here with you for the long term to build a real business. That’s point number one. We are here to work with you to invest in the long term, to build a long term great business and we have the track record to prove to you that we can do that.
Number two, we talk about how we are there in the foxhole with the entrepreneur to help actively build a company, we are actively engaged on all aspects of company building, like hiring and strategy discussions. We're certainly not here to micromanage, certainly not to operate the business, but be there as a friend, philosopher, guide as we help entrepreneurs build a successful company. So, we have the perspective to be with them through the good times and bad times; there will always be bad times, and, through all of it, we want to be the first call they make to help them navigate through those issues and challenges. So, that’s the pitch. We say, “Call any single entrepreneur we backed,” and they are our best advocates, so that’s how we make the case.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
KS: I can kind of break it into two phases: from the Austin Ventures days we had companies like Spatial Wireless, which we sold for about $300 million; Navini Networks for the same amount; Lifesize, for about $400 million change; and then Mavenir Systems, which IPOed on the New York Stock Exchange. All combined, it must be $1 billion to $1.5 billion of enterprise value across them.
At LiveOak, we have a young portfolio but we’ve had a couple of very nice exits in Opcity and Digital Pharmacist, which we announced in the last three months or so; Opcity was sold to News Corp, and Digital Pharmacist got acquired by a private equity player. One was real estate meets tech, one was healthcare meets tech, but both were solving compelling problems and using technology to go deal with critical challenges in those two industries.
Then we’ve got still private companies that are doing phenomenally well, like CS Disco, which just raised $83 million; Asa Software for e-discovery, with a spectacular entrepreneur who formed the company out of a law firm; Ojo Labs, which is a real estate AI chat consumer experience management platform. That was a second time entrepreneur who had taken a company public in Austin. Then we’ve got Infocyte in cybersecurity and Telestax; we’ve just got a lot of interesting companies, which are emerging as the next generation that can be massive movers for the fund.
VN: What are some lessons you learned?
KS: Besides the obvious, which we have talked about, that team matters, the second thing I would tell you is the neighborhood matters. You can have a gorgeous house in a terrible neighborhood, and it’s very difficult to generate equity value out of that. So, we think a lot about, after you get past the person and the founding team question, is this an industry segment that will let you generate significant equity values if you are are successful? Is this a market segment which is prime for disruption or not? Or is it one of those that’s very hard, very sticky, very hard to change? So, we think a lot about neighborhoods, in terms of is it one that is easy to scale revenues? And, if you scale revenues, can you ever make equity value out of those things or not? Neighborhood is obviously very important, very powerful and I think that’s the second lesson learned with respect to delivering great returns for LPs.
VN: What excites you the most about your position as VC?
KS: The most exciting part of the job, undoubtedly, is to come in day after day and just get really energized by amazing people and entrepreneurs who come in to pitch their life’s dream to you. We are very respectful of that, of people sharing their dream, passion, excitement, and very honored to come in day after day to listen to amazing people with their really creative ideas. It’s humbling, it’s energizing, it’s invigorating, and it’s exciting that you can help empower people with capital and see their ideas go and transform entire industries in a short period of three years, in some cases. It’s spectacular to have a catbird seat to be able to do that.
VN: Is there anything else that you think I should know about you or the firm or your thoughts about the venture industry in general?
KS: Fund II is clearly the beginnings of a franchise, with a lot of exciting companies underway here. When you think about building a franchise, you think everything from expanding team, we’ve added to the team here, to how you are building a long term legacy in this market. We have a lot of very active community involvement, we have tremendous causes that we support both with partner’s capital, as well as on their boards. All of this is about driving a long term franchise that will have real staying power.
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