Founded in 2016, Afore Capital makes pre-seed investments of between $500k and $1 millionRead more...
Brendan Baker was the second employee at AngelList before becoming a Director at Greylock
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.
Brendan Baker is a partner at Ridge Ventures.
Baker recently joined Ridge Ventures after spending the past few years working with early-stage venture funds like Ridge, Wing and Hone Capital, as well as companies and accelerators like Passport, Shift, Batch, AngelPad, Techstars and more.
Prior to this, Baker was a Director at Greylock, founding a program to build new data and software systems to find and evaluate new investments. Earlier in his career, Baker was the second employee at AngelList, overseeing 8000 pitches and helping more than 300 startups raise tens of millions of dollars in total funding. During his tenure, pitch circulation and startup introductions at AngelList increased 50-100 percent month over month. Since AngelList, he has worked with more than 1,000 founders on their fundraising narratives, strategy and tactics.
Before acquiring his MBA from the University of Oxford, Baker also launched and managed the distribution of low-cost water and energy products in Ethiopia and Senegal, in tandem with Practica Foundation and EnterpriseWorks.
VatorNews: What is your investment philosophy or methodology?
Brendan Baker: Ridge Ventures is basically a two year old firm that is over 20 years old. We have rebranded and emerged with a new strategy recently, or an evolved strategy I should say, but it’s based, historically, on IDG Ventures, which has a long history and a string of hits.
Ridge, more recently, has honed in on enterprise and B2B focused companies. We are early stage, historically we’ve done Series A, and as seed has grown we’re doing more and more investments in large, established seed rounds. We love to write checks between $2 and $5 million into round sizes that are $5 to $10 million. We love experienced and repeat founders; if they’ve built a business before, even if wasn't a $1 billion business, we love those types of founders. Also, folks who have been executives at credible startups or larger enterprises, we love to invest in them for the next phase of their journey as well.
VN: What are the opportunities you see in enterprise and B2B? Why is that interesting to you?
BB: For the firm, it's what we’ve done well for a long time. We had some hits; these were before I arrived, or at least they were investments before I arrived, including Krux, which sold for about $1 billion, and Fastly, which recently went public. So, we have quite a bit of experience in marketing-type SaaS, different functional areas of SaaS, as well as deeper into infrastructure, like the Fastly example.
Me, personally, I'm still figuring it out and since I’m relatively new to this role I want to take some time to figure out where I really see the exciting opportunities. The two that I am initially really excited about are, first, the infrastructure that supports the next generation of commerce, which I believe is mostly online e-commerce and B2C, but not exclusively. So, as consumers are buying in very different ways, as companies are being built with very different ethoses, what do they need to support them? The second area I think we’re getting wrong in Silicon Valley is we are not always understanding what opportunity and great teams look like for tackling areas of industry that are a little heavier duty. I have some background in materials engineering and construction, and I am really excited about what we build for industries like construction, mineral processing, mining, energy, and, specifically, what the founding teams need to look how and how much of an industry DNA they need to have.
VN: Those are areas where, I would say, they traditonally haven’t been tech heavy, but are becoming that way. How do you see those spaces evolving?
BB: I think they’ve been tech heavy for a long time; if I think about mineral processing, it’s an incredibly complex series of technologies. It’s just been approached from a different angle and with different investment horizons. We’re going to be able to build very interesting things in automation, using data to be more intelligent about that, and some of that is going to come from Silicon Valley. How we coordinate work forces will some of the most interesting initial use cases, which not always tremendously difficult technology but it requires a very nuanced understanding of how humans work in these contexts and what sets of assumptions we have that are wrong. If we build a product that requires a certain level of equipment, or a certain quality of phone, that might be the assumption we’re going to get wrong, when, in fact, handheld devices are ubiquitous but we need to have a wider understanding of what people are actually using on the ground to build products that work for all of them across their various devices. Those are going to look different in the field than they do in the office.
VN: What's the big macro trend you're betting on?
BB: The initial bet that there is a new generation of rising decision makers within these industries who have an openness to adopting technology that looks a little more disruptive, sometimes a little more raw, and systems that can accommodate that, and that aren’t particularly fragile or don’t require huge cycles for replacement or upgrade. My hope is that there is a sufficient bench of these decision makers in the industries that are looking for new solutions, and are looking to do things more efficiently, and, perhaps, have a different view of what risks look like for them and their jobs and their companies. If that's the case then it’s going to be pretty accessible to companies that have some DNA outside of those industries, and if that’s not the case it’s going to be very difficult.
VN: What seems to be happening in those old guard industries is that the older generation is distrustful of technology, but the up and coming generations are much more comfortable with it.
BB: I have spent my first co-opt term in a foundry that made car parts for Jeep and Mercedes, and what you’re saying rings true. But what’s happened now is that so many people who have used more modern technologies in their personal lives, or in this grey space between what we consider personal and productive, maybe it’s managing our families or managing groups through Slack, not in a work context, we have exposure to what a good UI should be, or what an efficient product should be. So, I think our standards are higher then maybe they were a generation or two ago, and we’re bringing some of those standards into work. We’re not just taking our cues from what a previous generation within a company did, and you can see it in a lot of these companies that are becoming, at least from the outside, modern quite quickly. I think about John Deere and how assertively it’s pushing into automation around agriculture, and I have to give them props for that. It’s been very interesting and I would not have expected that out of John Deere 20 years ago.
VN: What is the size of your current fund and how many investments do you typically make in a year?
BB: We invest out of a $135 million fund, and we will hopefully make about 20 large seed/small Series A investments, and another 20 smaller pre-seed or seed investments, which is to say about five core investments a year, maybe slightly more. The team size is five investors.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
BB: I don't believe we have hard numbers, but I do believe that we do have relatively defined stages. As an aside, this is a problem that the entire industry is wrestling with right now: what is a pre-seed? What is a seed? What is a Series A? What do those numbers look like in different verticals and types of businesses? This is a complicated and challenging point for founders right now.
In my mind, pre-seed is pre-product, the vast majority of the time, and you’re investing in the potential of a team, and maybe some early work. Seed stage increasingly is post-revenues, or post-data, so there is a product that is being used by humans, by customers, and is sending out some kind of data that can help you understand the world the world a little bit better. There’s usually some early revenues and most of the time those revenues are far from conclusive about whether this business is working; it’s going to be early pilots or LOIs or trial contracts or whatnot. For larger contract sizes it’s probably going to be one, two, three, five contracts versus 10, 15 or 20, so the first dollars have come in but its still very uncertain.
Then Series A we’re seeing a little more traction, more data points, and those numbers vary. In the industry it’s $1 million in ARR to up from there, but it depends on the type of revenue, whether it’s a lot of small contracts or a few big ones. It depends on how they’ve been in market, it depends on the nature of the industry. We are in a period of flux and these boundaries are really blurred, so what we care about is that there are some early dollars that have come in the door, and the team has not consecutively figured out how the machine is going to work and that’s where we love to be, helping to make the machine work moving forward.
VN: What other signals do you look for? Team, product, macro market?
BB: The market we can figure out. If we can’t figure out market size as an investor then we’re probably in the wrong business, so it’s helpful if they can communicate that to us but we can do that homework.
Product, to me, is a beautiful reflection of how a team thinks about the world. So, I always look at a product as a window into how they build and how they view their industry. You can also look at how customers who are using their product talk about how easy it is, or how it makes their lives better, so it’s a very good indication of whether a team knows an industry well, or knows their customer well. For me, that’s a beautiful clue.
Personal characteristics that I love to see are openness and transparency. It’s sometimes a lot to ask for founders to be transparent when they’re sitting across the table from an investor but, for me, it really helps build a relationship and it is not drawback; it usually makes me more interested in getting involved, and I try to be transparent on the other side to support that.
The last thing is trying to figure out if there’s a sense of urgency in the company, or a pace, and where that urgency comes from. How fast are they moving? How long have they been building? And who on the team is creating that urgency and injecting it into the rest of the company? That is a critical thing for me, because when you see it, and when you see the company, even at early stages, is moving very quickly it becomes exciting fast. It seems to generally be the CEO, but not always. Usually the CEO is the person who maybe doesn’t have the loudest voice in the company but at least has a prominent voice in the company and the community around them, and has a lot of influence. It’s helpful for that person to be injecting a lot of urgency into the system.
One other thing to look for is whether that is one person on the team; if there’s a team of three people, is there just one person who’s really driving us forward or is that load shared between a couple of people on the team? If it's shared, then that’s a bonus because it means that when times get tough, or when one of those founding team members needs to step back to fund raise or for whatever personal reason, it means that there's still somebody that’s supporting driving the company forward. It also adds more room for error, so I love to see that injection of urgency coming from more than one person on the team, but it doesn’t seem to always be the case.
VN: What do you think about valuations these days? What's a typical Seed pre-money valuation and Series A?
BB: I think about this all the time, and there are two parts to the answer. The first part is what they are today and second part is how are they set in the context of the fundraising process? Where they are today is moving a lot; pre-seed is all over the map, because it depends on what type of track record a founding team has. Seed seems to be coming to a space where established seed rounds with an institutional lead investor that’s setting the terms are ending up in the $2 to $6 million round size, and it seems like those valuations are between $10 and $20 million, maybe if you want to push me harder $12 to $16 or $17 million. Series A, the low bar for many companies seems to be $15 to $20 million, and it just goes up from there depending on how much momentum there is. That’s where I think most of them are, though there’s a wide range, so there’s going to be a lot of examples that fall out of that.
The other component is how they’re set. To me, the cold truth is that valuation is what the market will pay, and what the market will pay reflects how successful the fundraising process was. For founders, the objective of a fundraising process, or at least a well run one, is to get to a point where they have more than one available offer from investors that they would work with, and then they’re going to be able to choose whether they want to make that decision based on valuation or their relationship with the investor, or you get into a situation where price changes because there’s more than one firm. But, really, it just comes down to whether you’ve run a successful process of fundraising from beginning to end and whether that results in one term sheet or three. That’s, unfortunately, the cold hard truth.
VN: How do higher valuations that affect companies? Does it have a negative effect on them to chase potentially higher valuations than they’re actually worth?
BB: Chasing higher values than they’re worth at that stage may cause problems down the road where you have to hit the next milestone to keep everybody happy at the company. On balance, it’s a reasonably healthy thing in the ecosystem where well run companies with a lot of potential are being fairly valued maybe in a way that they weren't a few years ago or aren’t in other ecosystems that are a little smaller than Silicon Valley or New York. I don't see, in a macro sense, that it's a huge problem; it does make life difficult for investors but I don’t know that we need a ton of sympathy.
One more thing I want to say is that it’s on us, as investors, to communicate what we’re going to bring to the table and have that move beyond vague promises of value-add across from a table. The bar is higher for investors on our side of the table to do a good job of communicating that value, and that’s on us. We have to figure that out.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
BB: The first thing that makes life a little easier at Ridge, that I discovered, is that a lot of our opportunities come through founders we’re worked with in the past, whether it’s them coming back to work us again or them referring somebody enthusiastically to work with us. That has been real and has made life a lot easier in my early days because of the work that my partners did before I got here. That close network endorsement and referral is powerful for us.
The way we try to communicate it more broadly is, everybody is tired of the term ‘founder friendly.’ I am tired of it, but if you really dig in what does that mean? For us it means concise, clear term sheets. It means never voting a founding CEO out of a company. It means working to support them through difficult times. My partner Alex Rosen has a phrase that he likes to use, which I kind of like actually, he says he likes to be a wartime consigliere of a CEO, so he likes to be in the background and know how to support when called upon, and that’s the way Ridge works. It’s quiet, I admit; we have not done a great job of figuring out how to shout about this, but I can say it is real and palpable when we speak to founders who have found us through people that we know over many years.
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?
BB: Well, I've just joined and can't yet be public about any investments I've led, but I love many of the companies that my colleagues have backed.
I'm excited about MaintainX, which combines technology and in-company workflows into a modern maintenance management system in crazy environments. I love what the team at Outlier are building, which monitors your business or functional level data to identify anomalies, and makes it easy for a team to explore that data, learn more and act. And to me, Grabango could be powerful for grocers who want to take on Amazon, by retrofitting cashierless checkout technology in existing stores. These all combine a clever technological approach with UI that humans can actually use in a business context. I love that.
VN: What are some lessons you learned?
BB: I came to Silicon Valley about 10 years ago, I was in the UK at the time, and I came to build, basically. I had come into contact with a handful of people from the Valley and I was amazed by how they spoke about the world, turning small things into big things, and I knew that that’s where my people were.
The first place I ended up, fortunately, was AngelList very early on, really before it took off by about three weeks, as the second employees. At AngelList I was the front door to the platform for eight of the first nine months that we were live, and screened about 8,000 pitches, connecting 300 to 500 founders, I’d say, with a few thousand investors. So, what that gave me was two things; one, a window into how you might be able to do venture differently, or at least some of the philosophies that changed the industry moving forward. Two, an ocean of companies opportunities, founders, deals to learn from. I could learn what was interesting and what had potential.
I went to Greylock after that where I worked with a small team internally to try to rethink how we could do venture using data, mostly, and also process systems, as well as working closely, but not on, the investing team. Since Greylock, I worked with a handful of firms, like and including Ridge, to try to rethink different corners of venture, generally from an analytical point of view. That’s how I came into contact with Ridge; I’d been working with them for a year here every week in the office and we figured out that it would be a nice fit and went from there.
I can speak to this as an observer, not as a first person, because I haven't been a venture backed entrepreneur, but I have observed people at close range. The first thing that seems obvious to me, as an observer, but is hard when you're in it, is that this is a very long game. It seems like the difficult times outnumber the euphoric times by some factor, and in those difficult times it’s really important to a) be kind to yourself, b) have some support process to understand how this is effecting you as a human, and c) build the network of strong relationships around you to do that. It’s kind of like going to battle again and again, where it feels like you’re failing and you really want to have people around you that can support you through that. I don't think that becomes obvious until years three, four, five, six, when a lot of founders burn out because it’s been a slog, but I think that’s very difficult.
It seems like you're constantly reexamining your relationship with failure because you’re trying things for the first time every single week. Even if you’ve done something in a large company, like started a business unit or made a key hire, it’s going to look different in a company that you’re running. So, you’re constantly encountering new situations you’ve never seen before and feeling like you’re failing, and giving yourself credit for the successes, and a little bit or forgiveness and space for your perceived failures, is really important.
VN: What excites you the most about your position as VC?
BB: What I love is thinking and learning how our industry works, and thinking about how it can work in the future. So, my job at Ridge is half investing in the traditional sense, and half building the layers of the firm that I think are going to matter long after I leave. So, it’s a perfect role for me where I get to be amazed and intrigued by smart people who know more than me every single day, but I also get to think forward to five or 10 years into what we should be. That’s a very exciting thing.
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