Founded in 2016, Afore Capital makes pre-seed investments of between $500k and $1 millionRead more...
Kim founded Formation 8 and was previously a General Partner at Khosla Ventures
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.
Jim Kim is Founder and General Partner at Builders VC
Prior to Builders, Kim founded Formation 8 and served as its Managing Partner. He currently serves on the boards of Bowers & Wilkins (EVA Automation), Bolt Threads, Fieldwire, Bowery Valuation, and Notable Labs.
He also formerly served as a General Partner at Khosla Ventures and a Senior Partner at CMEA Capital. Jim began his career by founding GE’s Venture Capital effort and leading investments in China High Speed Transmission, and ComScore.
Kim received undergraduate degrees in Computer Science & Electrical Engineering and Political Science from MIT, where he also founded a venture-backed Internet infrastructure start-up with fellow Course 6 students. He also holds a Masters Degree in Quantitative Data Analysis from Columbia University and an MBA from Columbia Business School.
VatorNews: What is your investment philosophy or methodology?
Jim Kim: The whole thesis behind Builders is to go after antiquated, unsexy industries. I’ve never, in my career, been a great consumer investor or picker of trends; I don't even know what problem Snapchat solves, and there are plenty of investors who are great at that. My career, my background, has always been going after unsexy spaces, looking at real, meaningful problems in these spaces, and identifying the entrepreneurs and technology companies who go after these spaces with really just good tech. You don't need stuff to shoot rockets to the moon, but when you’re solving an industry like agriculture or oil field services or animal health, these are industries where pen and paper is largely the methodology for running the business, and we think that technology companies can come in, solve meaningful problems, make these industries more efficient, provide visibility into operations and then recommendations in how to run these businesses more efficiently. We think that's the biggest opportunity in tech. We’re Series A focused in companies that are impacting these antiquated industries.
VN: What are your categories of interest?
JK: We’re really focused on four verticals, but let me talk about we how got to those four verticals, because that’s part of the story as well.
We looked at all these different industry verticals and we said, “Where’s the low hanging fruit tech opportunity?” For the most part, there have been some really great enterprise and SaaS companies, horizontal plays that have been built, and the market’s pretty crowded there with some great venture firms that are playing in that space. We said, “Let’s look at these vertical industries where IT, as a percentage of revenue, is de minimis." Take an area like fintech; over 6 percent of revenue is spent on IT, and this is why places like Goldman, Bank of America, etc have billion dollar IT budgets. The flipside of the equation is an industry like agriculture, where less than one tenth of one percent of revenue is spent on IT. It’s kind of shocking that that's the case given it’s a trillion dollar global industry, but, for the most part, there has not been technology adoption. We were some of the first ones to actually play in that space and have some good results, and it’s really what we view as a greenfield opportunity.
Now, the key to going into these industries is have to know the industry; you can’t take a kid out of Stanford who’s never done anything and say, “Alright, go solve oil field services. Go solve real estate.” So, we try to find entrepreneurs who are technology savvy but they also have to have industry expertise. Whether that comes through partnering with somebody who comes from the space and knows the industry and pain points, or they have it themselves through a family business that they grew up in, that’s what we tend to look for.
The four verticals where we’re active are agriculture, industrial technology, health IT and real estate.
VN: What's the big macro trend you're betting on?
JK: The macro trend varies somewhat industry to industry, but part of it is driven by the fact that decision making is largely based on pen and paper. The need for efficiency is driving technology to be adopted by people who, frankly, did not have interest in adopting technology before. As an example, your average farm owner is 57 years old, so you go to 57 year old farmer who has literally no background in technology, and you say to them, “Hey, I have this wonderful, awesome technology that you can apply.” If they aren't aware of the benefits, if they aren’t very clearly attuned to the problem that you are solving for them, there’s zero receptivity to that.
In some sense, we’re lucky that there’s a demographic trend, because many of these old world industries are now transitioning to a younger generation who demand real time insights. We live in a world where enough data is collected, though most of it’s complete bullshit, but enough data is collected that you can gleam some interesting insights. I would argue that it's the generational push, the need for efficiency, the enabling of technologies becoming cheaper and easier to use, and the real pain points being identified. That's why we think these industries are ready to adopt this stuff.
VN: How do you prove that value to people who haven't used technology before?
JK: I’ll give you an example. We have a company in our portfolio called Performance Livestock Analytics, and this is a company going after the cattle ranching space. So, on one side people are looking at protein, and there’s no doubt that we need more protein. One approach has been the Silicon Valley darling right now, which is, “Let's go invest in plant-based hamburger, ground beef, and we’ll make it taste really good.” Certainly there’s a push towards that, it’s interesting, and there’s certainly receptivity towards it. However, the cattle industry is the largest industry vertical in eight U.S. states, so it ain't going anywhere. The problem this industry has faced, historically, has been the mom and pop players are going out of business, and that’s because they don't have the scale of the large organizations, they don't know cattle to cattle, cow to cow, whether they’re making any money, because they’re making buying decisions based on gut feel and what’s been done for the past 30 years, what they’ve been taught. What Performance Livestock does is they actually provide visibility into the operations of a cattle ranch, so from the purchasing of grain to the feeding of the grain to the cow to the daily process of feeding- how many times do you feed? What are the daily results in real time? All the way to the point where you sell that cow off, they are collecting that information and making that visible to the cattle rancher.
We’ve seen some crazy behavior from cattle ranchers; some cattle ranchers, just based on gut feel, say, “You know what? I’m going to feed my cows three times a day.” You don't need to do that, that’s actually a hindrance to the cow, but, “That's how grandpa did it and that’s how I’m going to do it," no matter the fact that they will probably lose $500 per cow doing that. They've never had that visibility before. That’s what this company is doing, providing that visibility, and once you have that you can make better decisions about feeding, about the mixture of hay versus corn feed, about feed additives. You can track that cow, you can start making optimization a part of your routine because now you have insights you’ve never had before. Customers are using this software five to six hours a day, seven days a week, when they were using pen and paper before.
VN: What is the size of your current fund and how many investments do you typically make in a year? What stage/series do you invest in and how much is that in dollar amount for you?
JK: It’s a $175 million fund, mainly focused on Series A opportunities where our average check size $3 to $10 million; our largest one to date has been $9 million in a real estate company in New York.
The number of investments per year, I don't think we see a rush in putting money to work, which is a macro trend for VC right now; in fact, everybody’s sitting on more capital than they’ve ever sat on, which basically leads to a pretty tough environment for firms that actually have a philosophy around valuation. We hope to make six to eight new investments per year, so not a “shovel money out the door” pace, but rather really understand these industries we’re operating in, get to know the companies and then really bring quite a few of the resources that we have to bear to help them win. The downside of not being in Silicon Valley is sometimes there’s more of an education process on raising money, on metrics to run your business by, for these entrepreneurs. So, there’s a little bit more hand holding that we sometimes find.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
JK: I don't think we have a set and fast rule. It is fascinating, I was at the Bloomberg Venture Forward conference last week and they were talking about there’s seed, post-seed, pre-A, seed-extension. It’s literally focused on every subset, it’s kind of nuts. I’m old school, I learned this business from Pierre Lamond from Sequoia and Vinod Khosla from Kleiner and Khosla Ventures. We do Series A where you get really involved in the company, take enough ownership that, from an economic perspective, it actually makes sense for your fund, and really make sure you’re helping the company.
If you’re going to adopt that philosophy, where you’re writing checks in that $3 to $10 million range, you want to see the company have, first off, a phenomenal technical team, because that’s what mitigates burn and gets you to market faster. It’s a team that can adjust on the fly because you’re constantly making tweaks to the product and running experiments, so kick ass technical team is first. Secondly, you want to see that the company has identified the pain point and that you, as an investor, can validate that those pain points really exist. There are various different metrics you can use to validate that point; one could be revenue, another one could be contracts that are, in essence, lock-in use of the product, and another could be letters of intent, all the way down to, “I’m just interested as a customer.” We want to be on the far edge of that spectrum, closer to the revenue side; it doesn’t necessarily have to have revenue, but we want to see customers using the product, engaged in it, and that allows us to diligence whether or not this is really addressing a pain point and, specifically, if it’s a vitamin or an antibiotic.
VN: What do you think about valuations these days? What's a typical Seed pre-money valuation and Series A?
JK: Last year seed investing was down relative to years before, in a pretty significant way. So, there were a bunch of seed funded companies that were having difficulty working their way through the normal pathway and what ended up happening there is that a lot of them ended up getting seed extensions. So, some of those are popping up now, and, in many cases, they’ve raised enough money that would qualify for a traditional Series A. They’re one round behind their skis. That's at seed side. A little less activity than years past, certainly still plenty of capital floating out there because everybody and their mother seems to have a seed fund.
I don’t think it's ever been easier to start a company, but I do think that at the A round it’s hard. That’s a function of funds getting larger, so it doesn't make sense for a $1 billion venture fund to write a $6 million traditional Series A check, because it just doesn’t move the needle. So, with all of our peers just getting larger, they’ve gone a bit up market, so where you’re seeing valuations be below crazy nuts, but certainly aggressive, is Series B to Series C. That’s where people are raising pretty large rounds; it used to be you’d raise $15 to $20 million in a Series B, now the number seems to be $40 to $50 million. That’s where valuations have gone really high, and if you look at multiples of ARR for SaaS businesses, they’ve scaled up to the upper teens and twenties when you’re approaching that Series B and certainly C. There’s plenty of money competing over that because at that point your business is largely baked and it’s an execution play, so what is your value add really going to be a venture investor? I can pull the lever on, “I can give you a lot of money at a very high price” or some firms are really great at fostering M&A, but those are really the two major differentiation points when it comes to that later stage capital, so valuations there have been aggressive.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners? How do you differentiate your fund to entrepreneurs?
JK: From the LP side, I’ve been in this business for 12 years; damn I feel kind of old! I’ve been through multiple up and down cycles. I do think that venture has a very large apprenticeship component to it, and to that end I’m extraordinarily grateful for the experience of having learned from two of Silicon Valley’s giants, and, to me, that was just a tremendous experience. History tends to play itself over again, or some flavor of it over again, so learning from that experience has been phenomenal. So, it’s not like we’re newbies at this game, this is a group of folks that has done this for quite some time and has a lot of experience.
The second element is we do half of our investments outside of Silicon Valley; that means we live on airplanes. We’re not just of the mindset that the world ends at the Bay Bridge and San Jose, we believe that there’s opportunity everywhere to find great companies, whether it’s Ames, Iowa or Houston; we have an office in Calgary, Canada because we think there’s opportunity up there. We’re willing to look everywhere, and, in fact, that's how you find the centers of excellence for the industries that we’re involved in.
The third element is that entrepreneurs and LPs both will ask, “Why would I work with you guys at a discount when I could choose other capital?” There are plenty of options for capital out there: family offices, venture funds, strategicsl like one out of five investments now has a strategic investor. In that environment, what are you doing that’s different? Largely in this world everybody’s one or two contacts points away from someone who you need an introduction from, so we do that, but I think everybody plays that game. The thing is we have deep sector knowledge in the industries where we’re active, so in every industry not only do we have an industry expert who provides us with color; for example, a guy like Jim Blome who used to run Bayer Crop Sciences, he bought Monsanto and he’s one of the most powerful in agriculture, he’s part of our team and he helps us evaluate agtech investments. You couldn’t ask for anybody better than that. On top of that, the deep sector expertise includes strategic LPs; one of our LPs is the Wilbur-Ellis corporation, which is the largest distributor of agricultural products on the west coast. Phenomenal group, great group of people, they own the grower, they have the customer relationships; not only are they potentially providers of channel to our portfolio companies but they give us phenomenal industry insight. So, we don't go into these sectors blind, we really try to bring sector knowledge to bear that is deeper than other funds that we end up running into.
Then the last bit would be something that we’ve coined “B2” which is a group of operating partners, most of whom we’ve known since our days at Khosla and who came with us through Formation 8 and the whole nine yards. These folks really have phenomenal chops when it comes to addressing the pain point of the entrepreneur, which is how do I build my company? How do I accelerate the growth of my company on the capital that I have? It can be user acquisition and spending capital efficiently there, determining what experiments to run and how to not light money on fire getting customers. We even have a shrink on staff; if you’re familiar with the show Billions and Wendy Rhoades, we have one of them on staff because entrepreneurs have a hard job and we want them to channel their energy toward building a great culture. So, those types of things we do to help entrepreneurs because we’ve been them and we know how hard the job is.
VN: What are some lessons you learned?
JK: It’s a hard question because there’s so much, and I’ve been through some absolutely crazy things.
I think founders have to have a bit of a reality distortion field, because, in some sense, they’re trying to change something that hasn't been tackled, or has only been tackled poorly, before. So, you have to be a little bit nuts to want to change something and you have to be willing to bash your head against the wall repeatedly when everybody’s telling you you’re nuts. But you also have to balance that with reality and you have to balance that with transparency to your investors because, ideally, your investors are going to help. So, there’s a balance between that aggressiveness and self awareness to understand when something’s not working. I think that's really hard and, ideally, it’s something that we help with, and we encourage our entrepreneurs to give us homework as they go through this journey of trying to figure out whether something is working or not. Whether it’s introductions or customers or giving them process to identify when something’s working, or if an experiment is taking off or failing, that’s something that I think you have to have been in this business a little while to have seen many cases of it succeeding or failing. We’re still learning, but that’s certainly one of the arts of being a good venture capitalist is identifying the entrepreneur who has that combination self awareness and drive.
VN: What excites you the most about your position as VC?
JK: For me, I guess was the rare person out of college who knew 100 percent what I wanted to do with my career, and I think part of it was starting a company in college pitching to VCs and then realizing that people on the other side of the table were having a lot of fun. So I said, “I want that job.” I guess it’s a bit of ADD, but it’s also the fun, the honor, of working with people who are really, really smart, who are tackling really tough problems. I get to learn from them every day. That's the best part of the job; whether it’s The Bowery Valuation guys, who are trying to get pen and paper out of the appraisal process in commercial real estate, or whether it’s Checkerspot, who’s developing novel materials in a way that hasn't been done before for applications and skis and surfboards, or whether it’s the Notable Lab guys who I feel confident are going to have a major role in curing certain types of cancer. Each of these entrepreneurs is doing something amazing and I get to be part of that journey, so that’s pretty cool.
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