Before co-founding Palm Drive Capital, Chan worked at Insight Venture Partners, a $23 billion venture capital and growth equity firm with investments in JD.com and Alibaba. He earned his BA at Stanford and is completing the OPM program at Harvard Business School.
Palm Drive Capital has invested in companies that include Jet.com, Clover Health and Zenefits
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.
While finishing his BS, BA, and MA at Stanford, Lee co-founded two companies and started investing in startups. Prior to co-founding Palm Drive Capital, he worked at AEA Investors where he worked on the purchase of Evoqua.
VN: What is your investment philosophy or methodology?
Seamon Chan: Palm Drive is based in New York; all the partners met each at Stanford so we know the Bay Area well, but we started the fund in New York because we wanted go beyond the Bay Area and Silicon Valley. We do investments there, some of them have done really well, but we think entrepreneurs can come from anywhere, with innovation and talent, so we like to talk to entrepreneurs in different areas in the U.S. like the Midwest, like New York, the East Coast, Canada, even parts of Latin America. We like to support some of those ecosystems in different areas because we think that’s how you get really great entrepreneurs and generate very good returns for investors as well.
VN: What are your categories of interest?
SC: Healthcare IT has been an interesting focus for the fund. For example, we invested in Clover Health, which has very, very smart investors involved in the company but we were able to bring our network, which was very complimentary for Clover. We introduced them to Cathay Life, which is really big insurance company based in Asia and they were able to join the round for $20 million. Also they entered into a data partnership with the company. So, we were able to be helpful to the company in areas that very complimentary for them and the other investors. We’re in a lot of other companies in the healthcare IT space because there’s a big aging population in the U.S. and globally, so having data, having AI, it’s not going to be solved using one drug or a medical device, but you need a whole system to manage chronic diseases. That’s how you really drive down costs in the healthcare system and align the incentives. So, that’s something we talk to Clover about a lot and that’s big area of interest. We’ve invested in other companies in the space as well that drive down the cost of healthcare, find the incentives, and make the system more efficient by driving compliance in healthcare.
Hendrick Lee: I just want to do a quick add-on to what Seamon’s saying. One reason that the partnership with Cathay, the Taiwanese insurance company, so interesting is that there's a need for more healthcare as the whole world starting aging even faster. There's more people 65 and older than five year olds now, for the first time in history. So, the global sharing of best practice and knowledge goes beyond just medicine and drugs, but also just how you manage chronic diseases. How do you manage the elderly population as there’s more of them? And how do you manage cost? I think it’s going to be very important for companies to both share ideas, as well as to collaborate, because this really is a global problem and it requires a big enough data set, and requires sharing of ideas, for us to really get through it. We’re already seeing healthcare costs ballooning in the U.S. but it’s happening all around the world. It’s not going to be solved with one policy, or one drug, because the truth is the world’s getting older faster than ever and the senior and longevity economy is going to be a bigger part of that. Eventually, if we live long enough, we’re all going to be a part of that. So, this is something that we’re very proud of investing in, and also helping out to set up one of the first global partnerships for Clover, and we see this as a model going forward for a lot of companies. We like to say, ‘There isn’t Asian diabetes and American diabetes or South American diabetes, there’s diabetes and it’s actually relatively similar around the world.' The cure isn’t one drug or one operation, it’s really finding out how do you sustain the person’s health over a long-term through lifestyle change, through monitoring and through better data.
SC: We’re not a healthcare fund, we’re software generalists, so there’s a few spaces that we spend a lot of time in, healthcare IT being one of them, but also e-commerce, financial technology and enterprise software.
I worked at Insight Venture Partners before, and Insight was involved in some pretty big e-commerce companies like JD.com and Alibaba. So, we’re definitely familiar with some of the players globally. We were investors in Jet.com in New York that was sold to Walmart for $3.2 billion, and I’m on the board of a company called Lentesplus, which is a cross between e-commerce and healthcare; they sell contact lenses in Latin America, so it’s e-commerce and logistics to help get contact lenses to people faster and at more affordable prices.
VN: What's the big macro trend you're betting on?
SC: I would say the big macro trend is valuations are very, very high across the board, especially in the Bay Area, and we think there are a lot of interesting companies that we can invest in at very reasonable valuations where we can add a lot of value in different tech ecosystems across the country and globally. We still do mostly U.S. investing, we’re not a very big fund, but we like how innovation is coming from everywhere and going across borders as well.
For example, there’s a company we invested in called WeLab, which is fintech company based in Hong Kong and they just got the first batch of virtual banking licenses in Hong Kong. They started with a lot of lending and data and now they have an opportunity to build a very interesting virtual bank as well. It’s not based in mainland China, which was sometimes not known as a tech ecosystem before until WeLab came out and lot of other companies came out. So, we like to support these new ecosystems, whether it’s in the U.S. or abroad. We have over 70 investments on five continents around the world, so that’s the big macro trend that we’re better on, that innovation can happen from anywhere.
HL: The partners, we came from the Bay Area, we’re still big believers of the methodology and also the people building companies there. We’re big believers in the Bay Area way in terms of how they built companies. We hope the rest of the world can get a bit of that.
A lot of people apply a very narrow lens on what is interesting about the Bay; they tend to think the Bay Area is full of technical talents that are very smart but are not very good at socializing etc. You know all the stereotypes you see either on TV or in movies. But what the Bay Area really represents is much deeper than that, it’s actually a culture that respects talent and meritocracy and also growth. It’s a belief that you could actually, it’s a cliché now, that you can make thing better, but part of that is by trying things, by growing new companies, by doing new things. Those ideas are more important than any technical skills that people in the Bay Area have. People who are able to management companies that grow at that speed, that is really the crowing achievement, and the most important thing in the Bay.
So, a lot of people think, ‘I have to go to the Bay Area because I have to find the best programmers,’ but if you look at the recent IPO of Zoom, for example, it’s a very technical product. They're not competing on some type of network effect, they’re competing on just quality of the product. They built a better product than everybody else. A lot of people, if you pay close attention to the prospectus on the IPO, a lot of their product team, as well as their technical team, was off-shore; they were not in the Bay Area. The CEO and a big part of the management team are in the Bay but they had a big off-shore team. So, what does that show you? I think it shows that management skills and ability to manage growth is very much something that the Bay Area is extremely strong in, and we still believe in that. This is why we like to disseminate some of the ideas and introduce our founders who are not from the Bay to advisers and people in the Bay Area who can help them navigate this process. But, at the same time, I do think the technical part of the business, people overrate how much the Bay is about programming, when it’s really about the culture and about people thinking a certain way.
Part of that is what Seamon was saying about how innovators can come from many different places, it could be anywhere. It could certainly come from the Bay Area as well, and we hope as the idea of the Bay Area spreads to more places, and we’re seeing this. At Goldman Sachs now you don’t have to wear a suit, you can wear jeans to work, and that idea is very much a west coast, San Francisco idea; that didn’t come from New York. So, we’re seeing that spread out in more mundane things but we hope that more of the culture will spread to more places and we would be following them around and supporting entrepreneurs who want to learn more and share these beliefs.
VN: What is the size of your current fund and how many investments do you typically make in a year?
SC: We don’t say the fund size in public because it’s changing all the time; it’s always going up. And we usually do 10 major investments a year.
HL: Just because we’re managed by the SEC we try not to talk too specifically about the fund because it’s sensitive, but we can say that we manage nine figures.
VN: What stage/series do you invest in and how much is that in dollar amount for you?
HL: We like to do Series A and Series B and we keep investing. We do some earlier stage deals, but we mostly do Series A and B. Part of it is they’re in places that sometimes they have incubators, they have angel investors, but they don’t really have the Series A funds because the ecosystem has not been as well developed.
SC: Usually we invest around $1.5 million. Of course, we go earlier as well, like $250,000 or $500,000 checks, but usually we try not to invest too much. We can join the board of a company or we could also company-invest in a round as well, so we’re pretty flexible, but we do like to invest in company when there’s some kind of traction or unit economics so then we know how we can be the most helpful to the company and help them grow.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
SC: We don’t have very specific numbers. Usually the companies we invest in have more than $1 million in revenue, whether that’s ARR or transactions or net revenue. Of course we go earlier or later as well, but usually with companies who have $1 million there’s some indication of unit economics and then we can be most helpful.
HL: Not every dollar of revenue is created equal. There isn’t a formula to this; it’s the story behind the revenue that matters more. What was the process of acquiring it? What was the customer experience in paying that revenue? And what is that process going forward? It’s very easy, especially for first time founders, to be seduced by the numbers they see in the press or that they hear. ‘Hey, they got the term sheet for this much,’ or, ‘They’re doing this much revenue,’ when the substance of what’s there, there’s no shortcut to that. Going through the process and understanding the customer journey, understanding the term or the mechanism on why people are leaving or staying, or why they’re paying more if they use whatever you build more, those are the characteristics of the $1 million revenue that, hopefully, could demonstrate additional numbers through unit economics.
VN: What other signals do you look for? Team, product, macro market?
SC: The more early stage, the more important the team is. We’ve backed some pretty amazing serial entrepreneurs that are very proven, so they’ve done it before or they’ve had a small exit and they’re looking to build a much bigger company. We’ve a good share of those.
I like the YC thing of being relentlessly resourceful, so being able to achieve a lot on very limited time or resources, that’s something we observe as we get to know our entrepreneurs. If they’re able to demonstrate that they’re very capital efficient, raising not that much money but being able to achieve a lot of revenue, that says a lot about the company, whereas vice versa, those companies raising a lot of money, like $100 million to get to $1 million in revenue, it means the team is not too efficient. It could be a special market or product they’re offering that might take a more long-term investment, but, in general, we do a lot of these internet and software models which you don’t need too much capital to get up and running. So, if you raise raise $1 million in funding and get to $1 million in revenue, I think that’s pretty good.
VN: What do you think about valuations these days? What's a typical Seed pre-money valuation and Series A?
SC: One of the reasons we like being in New York is it’s a little more valuation sensitive. I know in the Bay people just pay up and say, ‘If it’s high it must be a good company, a really good entrepreneur and we want to pay up for it, whatever price for it.’ So, they’re just creating very big markets. For us, we tend to be a little more sensitive to valuation. I guess we’ll pay up if it makes sense, but usually we look at the public market to compare with the startup companies that we look at. Of course, if a company is growing a lot faster then we can pay up a little bit, to a certain extent, but the public markets are trading at, like, for a SaaS company it’s what? Six to 10 times revenue? For an e-commerce company it’s like two times revenue. Those are some of the metrics that we see.
It’s a little harder for us to pay like 100 times revenue; I know a lot of deals in Silicon Valley are done in that range, but right now we’re a little more conservative. That way, when companies grow, it’s easier for them to raise the next round and eventually pursue some kind of exit. If the valuation is very high, and you’re getting it 100 times revenue, then sometimes it’s harder to raise the next round. Maybe it will keep going up like that, but usually when it gets closer to the public markets then it gets compressed, then there’s a long way to go down if you have 100 times revenue versus the other way around, where you have a very reasonable valuation, and there’s opportunity to expand the multiple when you go public.
For example, we invested in company that had three times price to revenue, actually it was a big position in our fund, and if they go public they can get at least three times, or even five or 10 times, if it trades really well. So, we’re thinking about a multiples expansion, not compression.
VN: You mentioned New York being more valuation sensitive. Why is that?
SC: I would say New York is a lot more disciplined than the Bay Area. New York investors are more financial so they’re more used to public market multiples, public market comparables. Sometimes the Bay Area investors are right; if the company is very exceptional then you better pay up because those companies grow so fast, they’re creating new markets, so it’s hard to use public market comparables. Or there’s a lot room for them to go get back to the public market multiples, because the companies will get so big. But most companies out there, they’ll get back to the public market comparables sooner or later, or a little sooner, so that’s why I would say New York investors have a little more discipline in terms of paying the valuation multiples, whereas on the Bay Area side I guess investors are more idealistic, which works sometimes, but, a lot of times, there’s a big cycles and then there’s a down cycle and everybody get burned, both investors and entrepreneurs. So, having a high valuation is not a good thing, even for the entrepreneur.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
SC: I would say just getting access to deals beyond the Bay Area. We have access to venture ecosystems that are not big enough to support funds in their own cities, they don’t have enough deal flow. We're able to find companies in that ecosystem and we’re able to invest and help them get very big. We provide a lot of assets to those companies. We have nine unicorns in our portfolio, and a lot of them we invested in in the very early stages. Just getting helping get access to some of those companies makes us very different from the other funds out there.
For example, not to get too specific here, but there some companies that we invested in and we were able to help the deals with value-add, helping them make introductions from a different network. In some of these deals they have the best investors from the Bay Area, but we were able to add value in a different way. One is that we help the company in terms of introductions, and in terms of recruiting or partnerships and customers and fundraising. The other is, given our access to companies outside of the usual network, we give a lot of access to that. That’s why we have a good number of CEOs in the portfolio who end up investing back into the fund, and that says a lot about our value-add and the access we provide to them.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
HL: If you ask entrepreneurs what they look for in investors, what we hear repeatedly, the first thing they ask for is help recruiting while they grow. A lot of funds offer that, and we do our best with that; we have our own network of engineers and friends that we work with to try to get them.
The second part is what Seamon mentioned: they usually want to find a way to grow revenue. Especially when it comes to B2B or medical healthcare IT companies, revenue means working with either old school partners or existing companies, or it means finding people to partner with. Being in New York, specifically, gives us a huge leg up; we’re able to help them get in touch with some of these guys they want to sell into, and that gives us a big leg up when it comes to working with our entrepreneurs. We consistently help them get new contracts and revenue.
The last part is basic knowledge and value-add and, again, what we talked about earlier are the cultural, as well as knowledge, aspects of the Bay Area. We spend a lot of time cultivating our relationships with multiple-time founders and they’re a very big reference and a value-add to the entrepreneurs who are starting a company the first time. One of our founders, when we invested in him, one of his requests was to get to shadow one of our other founders for a whole day. That gave us an in when we ended up investing.
SC: We just had dinner with one of portfolio founders yesterday, a very successful founder, a very serial entrepreneur, somebody with a very highly valued company now. He’s an investor in our fund and also a co-investor in some of our companies as well, we brought him in, and he has access to the best funds our there. He told us that we built up a fund with a very interesting portfolio, and hearing him say that, and getting support from him in our fund, that really says a lot about the companies that we’re able to get access to and also the value-add that we were able to bring to him.
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?
SC: One is called Output, which has a very successful serial entrepreneur. They’re based in Vancouver and they do innovation software for large companies, because everybody’s trying to innovate but it’s very hard to keep track of everything and incentivize people to stay on top of the innovation process, generating and implementing new ideas in corporations. He’s writing software to help do that. He’s able to sign up a lot of clients in very different industries in financial services and healthcare and energy. The CEO and founder, Jeff Natland, had a full blown IPO before with Neteller so definitely a very strong track record growing and starting and scaling tech companies. We’re helping him connect to very large companies in Asian and the U.S., places outside of his usual network
One I mentioned earlier is Lentesplus. I’m on the board of that company. It’s two Wharton founders who went back to Colombia, and they’re now operating in Colombia, Argentina and Mexico. It’s a very regulated business and they’re able to offer contact lenses with a much better variety, much better prices, to consumers down there. Logistics is also very bad so they’re able to deliver them to the consumers with much cheaper prices and they add a lot of value to the market. We’re pretty excited about that company. We think it will be a very big company in Latin America and we think Lentesplus has the potential to grow into a big monopoly in those markets.
HL: One that we’re also also quite proud of is a company called Catalyte. It’s a company based in Baltimore that uses AI to find talent and train them in software engineering. 40 percent of the talent we hire have no college degrees, and 70 percent of them have no IT background, and around half of them are minority in IT. Catalyte finds these people, trains them in software and hires them to do software outsourcing for Fortune 100 companies. It’s a company that does really well, partly because there’s a large part of the U.S. that’s still adapting to this new economy and we’re still under training people and, in many places in the U.S., the talents there have no opportunity to learn the skills. Also, the education system, a lot of times, has failed them. Some of our best programmers from Catalyte, they used to flip burgers, and this is their first white collar job. We’re able to identify them with data and AI and we train them to basically top software engineers and then we work with Fortune 100 firms who need help building more software.
This is a company that has a very strong social angle to it but also, economically, the software we produce, and the ratings our software engineers get, is higher than some of the most famous and big software consultants in the U.S.; I won’t name any names but they’re consultancies that charge you a lot more money with Ivy League grads but our grads outperform them. Partly that’s because we’re able to identify these talents and we have very good data and training. So, it’s something that is very meaningful to us because it’s really a mirror image of exactly what we want to do as investors, which is to find talents and companies that people are overlooking, but it’s also doing quite well by doing good. The CEO is a very interesting person to talk to because he’s doing something different from everybody else.
VN: What are some lessons you learned?
SC: There’s a lot of capital out there so you have to be very unique and able to differentiate and be very helpful to the entrepreneurs, and reputation is important. That’s why we take every meeting very seriously, whether we invest in them or not, and then we also try to add a lot of value to the companies that we do invest in. We even help companies that we actually don’t invest in sometimes, because if there’s an intro that we can do very easily, and can be helpful in general, we do that. VC is very much about community, so we just want to be helpful without expecting much in return. That’s very important to me.
HL: A big part about the Bay Area and Silicon Valley idea is paying it forward. It’s about spending time helping people, it’s about believing that people today who are underdogs can tomorrow be a successful founder. As investors, when you’re starting out you are the underdog but I think the most important thing is also to keep that mindset that if you’re doing well today, tomorrow there could be someone else you should help to also do well.
SC: You should have very open mind when meeting with companies. Diversity is very important in the industry, so just being to invest in companies outside of the tech ecosystem, in a lot of women and minority founders, as a minority-owned firm that’s something we care about a lot. That’s why we try to not have any biases and take every meeting seriously, regardless of where they’re from or what kind of background they have.
VN: What excites you the most about your position as VC?
SC: We like working with the best people that we find and being able to meet with entrepreneurs talking about interesting projects. Our job is to find the best people to work with on the entrepreneur side and the LP side, and just make them very successful. That’s very important because if they’re very successful then it’s very likely that we’re successful as an investor and facilitator in the ecosystem. That’s very exciting. When I wake up every day I'm excited about being able to meet with very interesting entrepreneurs and being able to help them grow their companies and achieve their dreams and goals.
HL: This job is about people. At our best, we’re spending time helping people we admire and we enjoy working with.
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