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Alchemist Accelerator graduates 70 companies a year in the enterprise space
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.
Ravi Belani is Managing Director at Alchemist Accelerator.
Belani formerly spent six years as part of the investment team at Draper Fisher Jurvetson’s Menlo Park global headquarters, where he led investments and served on the boards as the first institutional investor in companies such as Vizu (acq’d by Nielsen), Yield Software (acq’d by Autonomy), Justin.TV/Socialcam, Pubmatic, and Komli. Belani formerly worked in product management at two Kleiner Perkins enterprise startups, and as a consultant in McKinsey and Company’s San Francisco office.
He is a Phi Beta Kappa and Tau Beta Pi graduate of Stanford University, holding a BS with Distinction and MS in Industrial Engineering. Ravi also holds an MBA from Harvard Business School.
VatorNews: What is your investment philosophy or methodology?
Ravi Belani: Obviously you’re heard of Y Combinator and the main LP in YC when they started was Sequoia, the venture capital fund. I mention that because Alchemist is similar: I used to work at DFJ, the VC fund in Menlo Park, and DFJ was the anchor LP in Alchemist. It really got started, just for full context, as a reaction to this problem that the VCs were having, which was how to deal with seed stage investing. If they did seed stage investing, it was creating problems if they didn't follow-on the investments and that hurt the startups. Competitors to their seed investments weren't pitching the VCs because they felt like they'd already made an investment in the space, and so that hurt the VCs. So, doing seed stage hurt, but if they didn't do seed stage it also created problems: they were missing out on opportunities that were breaking out quicker and it was harder to stay abreast of what was happening in the ecosystem. So, the YC/Sequoia partnership seemed to solve that, but that's because people didn't perceive Y Combinator as Sequoia, but Sequoia was able to fund Dropbox and Airbnb and all these great companies that came out of YC. And so, Alchemist was similarly started in 2012 by a consortium of VC funds. It was DFJ, which was the anchor LP, then US Venture Partners, Mayfield, Foundation Capital and Khosla Ventures all funded it as well, with the mandate to build the premier launching pad for enterprise startups.
Our goal was to build the place where all the top enterprise startups will start from. We define enterprise as monetizing from any institution, so it's a very broad definition; your users can be consumers, like you could be Google, which is effectively an ad network, where your users are mainly consumers, but if you monetize from enterprises then you qualify. And so, our mandate is to fund what we think are the most promising startups that are in the enterprise space, and we think enterprise is just fundamentally different than consumer. Oftentimes, there's a difference between a customer and a user, a person who pays would be different than the user, and if you have an enterprise as a customer then the budget might be approved by somebody else versus the person using the product. And that just creates a fundamentally different strategy in terms of how you build startups.
We don’t admit any non-technical teams. They're generally not just technical, but intimidatingly technical so we have faculty from Stanford and Berkeley and former heads of business units of the darling tech companies, like Salesforce and Google, that have all joined Alchemist. And so, we're looking first for teams that have evidence of distinction to do something big, and teams with strong distinctive technical talent, going after markets that we think will warrant the interest of the top VC funds, and where they're monetizing from enterprises. The accelerator right now is 18 LPs, so we have five VCs, and then we have about a dozen corporates, including Salesforce and Cisco and Juniper.
We're generally viewed as the top enterprise accelerator. Right now, we invest $36,000 into about 70 companies a year. That's going up to 100, roughly, now that we're going to be launching our program in Europe, but we're generally viewed as the top B2B accelerator. We were rated number one by this report by CB insights in terms of how much money our companies raise, while Y Combinator was number two; they only did the study in 2016 so that's the only data that we have, but there are other third parties that rate accelerators and Alchemist generally gets a high rating, and usually in the enterprise space we're viewed as the top. We've now had 150 companies close institutional rounds of over a billion dollars of capital, and we've had 34 acquisitions.
Some of the alums that have raised include Rigetti, which has now raised $200 million, and LaunchDarkly, which has raised $125 million. The caliber of the funds that have invested in our alums is a great group. It's just a terrific crew of startups. So, that's what we're doing.
VN: Since you invest in enterprise, what verticals do you like and what are the opportunities you see there?
RB: We invest in everything. Because of the volume of what we're investing in, we are interested in everything. We have everything from infrastructure and DevOps, with companies like LaunchDarkly and Synata and YotaScale, to applications, like we have a company called Groove, which is an ex-Google team that's built this Salesforce killer, or Text IQ. We also do moonshots and deep disruptive tech. We've funded a company called Matternet, which has built out the premiere federated drone delivery network. So, we really fund everything, and it's predominantly software, but there's also a good amount of hardware, like it's about 15 to 20 percent hardware too. The only thing that we don't really do is just biotech, like drugs, but we do do tech for bio, and almost everything in the enterprise space, from SaaS to deeper tech.
VN: What's the big macro trend you're betting on?
RB: There's a couple that we're particularly excited about. One is the federation of intelligence, so just the distribution of intelligence both in terms of people and things. That affects everything, so just the ubiquity of sensors and devices that are now making smart enterprise, and that's both in terms of buildings and physical infrastructure as well as the whole value chain. So, the industrial internet and what's happening on the manufacturing and supply chain side is a very big thesis of ours. Our LPs include Siemens and GE and so we're looking at a lot of things that are transforming the industrial internet and we think that that's an opportunity where software has not eaten that world like it has in other spaces and that's going to be ripe for disruption.
We similarly think that you're seeing a federation of infrastructure now emerging. Everything is becoming disaggregated and agile, which is creating more robustness throughout the system. The emergence of the distributed ledger technologies, like blockchain, are things that we were incredibly excited and passionate about. And then also just companies that are creating platforms to aggregate disparate parts of the value chain to kill verticals are incredibly exciting to us as well.
And then vertical SasS and software. So, I think the other big trend in enterprise is, how do you respond to the threat of Amazon and Google and Microsoft, which are building the Costco of the enterprise software world? They're sacrificing all profit to create a huge distribution on their cloud systems and they're just eating up everybody. An antidote to that is to focus on the industry and lock it in with network effects so that it's immune to these horizontal plays. And so we like those as well. Then we like deep tech. The pace of acceleration on fundamental shifts in technology curves is occurring, so we're big proponents of quantum. We've funded Rigetti, which is a quantum computing company, and we funded a company called QC Ware, which is building the interface between quantum and traditional developers. We think that there's a lot happening in the energy space, and that's going to drive a lot of industries. So, we are looking at a lot of things in energy and cleantech, and then also in physical space, like literally thinking beyond the earth. We have a company called Positron, which is building an antimatter entity to go to Mars, we have a company called Shuttle, which is doing space flights.
The quick answer is we like everything. We're particularly looking for things that are going to create billion dollar plus market opportunities, so we're not interested in really strong businesses that have limited upside, we're very interested in taking lots of risk for companies that will really change the world and beyond.
VN: What is the size of your current fund and how many investments do you typically make in a year?
RB: Right now that fund is structured as an SPV, which means that every deal we do is a one-off basis, and that's just because we have a single LP, who's basically fulfilling all those deals and it makes sense to do each deal as an SPV. So, it's not a dedicated, regular fund. To answer your question, there's around $30 million of capital under management across the accelerator and the follow-on fund, but it's structured not as a traditional fund.
We’re typically doing one to two investments per quarter, so I think it's around six investments per year in the follow-on fund.
VN: How much is that in dollar amount for you?
RB: Typically it's around $300,000 checks into the company for the follow-on fund.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
RB: They don't have to have any traction in terms of revenue. We are very team-driven, so the most important criteria is the people. We have funded teams where they have left their employers on Monday and then joined Alchemist on Thursday and their first day since starting the company was when they joined Alchemist. We have also funded teams that have been working for 10 years on their companies. On average, our companies have been working for about a year, and it's typically teams of two to three, and they have some product built with some validation with customers, and they may or may not have revenue. Typically they have a little bit of revenue if they've already started but we also have companies that do have significant revenue when they join. The reason why is that the criteria is not based on revenue or traction, the criteria is based on teams and market. So, all we really care about is, is there a technical co-founder? Is there evidence of the technical co-founder doing something distinctive? Is the market that you're going after something that we think is novel and big?
VN: What specifically do you need to see from a team to do a follow-on investment?
RB: The ideal team is a three-person team with two technical co-founders flanking a business executioner. So, there's somebody who's just charging forward with the business, which is mainly traction or customers, and then you have two engineers or developers who are iterating on the product. That is the ideal, that is what gets our eyes wide open and we are incredibly excited when we see that. And then each of the team members should be distinctive in terms of their backgrounds but complimentary with one another. That is not the only thing that we will fund: we will also find solo founders and we'll also fund teams that are bigger, but we do find that that is the ideal profile in terms of having a size of team that can move quickly, communicate quickly and have an advantage of speed, which is the core advantage that startups have.
In terms of whether we invest further, we're looking how quickly teams can adapt and evolve. The program is six months and so we get a very strong feel for how quickly teams can move, and at what pace they can set an objective and achieve it and then also if they need to pivot, how quickly they pivot and how agile they are. We're looking for evidence of agility and adaptability. And then sometimes it's the markets more than the teams, and it can be that if you tap into a market that is exploding, it will raise all boats and it will also be a fantastic thing to invest in. So, we're looking for velocity, effectively, of either the speed with which the teams adapt or the velocity of their traction, just growing because of, or in spite of, themselves. It could be because the market is just really taking off.
VN: What do you think about valuations these days? Especially with COVID and the economy, how have you seen them trending recently?
RB: When we invest in the accelerator the valuations don't typically matter. Typically in the accelerator we're investing $36,000 for a single digit percentage of equity. How much that equity ends up being is up to negotiation and really when people join the accelerator, they usually don't care about the cash. The $36,000 is supposed to pay for rent in San Francisco for six months, but the spirit of the accelerator is more it's a partnership. You do get half a million dollars of perks in addition, so you can use that to justify the dilution, but the reality is that you're really joining a network where the hard metrics for the ROI are on increasing your funding valuation.
For the following investments, we typically are co-investing with top tier funds. We have 70 companies that go through Alchemist every year, we will do six follow-on investments, and so we’re very selective about which companies we invest in. We always are investing with a lead who's coming in and pricing the round and we may factor in, but usually it's a very sophisticated lead so the valuation gets set by them. But, to your point, we do think that valuations are decreasing. So, we're seeing valuations go down right now between 20 to 33 percent. We think it's tilting in favor of the investors and that's probably just because the supply of dry capital is shrinking because a lot of funds are reserved and are increasing their reserves to support their existing portfolio, so there's just less available capital for the startups. We are still seeing investors make investments because, one, they have their own IRRs that they need to return, so they want to deploy capital, and, two, most sophisticated investors know that this is actually a terrific time to invest because there's less competition in certain markets. Most big corporates are cutting their R&D and they're optimizing for profit, so once the economy shifts back, and they're optimizing for growth, they'll have a vacuum of innovation and that's when startups get acquired for a lot. Now is the window when you want to plant seeds so that you can reap them in 18 months to two years, so sophisticated investors are very actively investing right now. It’s just that the sales cycles, or the time to invest, is taking longer, and the valuations aren’t attractive.
VN: What does the decrease in valuations that mean for the companies when they go to raise their next round? If valuations are down so much is that going to be a positive for them since they're less likely to get a down round next time they go to raise money?
RB: Oh, that's interesting, although his might be their down round if they raised at a high valuation 18 months ago. Generally I'm not a big fan of worrying about if the next round is going to be a down round or up round and trying to plan for that because I think it's largely outside of your control. Your valuation is much more a function of the overall market and I know we can feel that now, but this is even true outside of COVID. In the pre or post-COVID world, valuations were really a function of the macroeconomic environment, and can be completely outside of your control, even if you've done phenomenally well in terms of your revenue and your growth or whatever. So, the only job that I think you have as a founder is to think about the health of the business, and to make sure that you have enough cash to last and to take the least dilution that's required for that cash from investors that are the best partners to work with.
If you have less than nine months of cash, and I would say if you have less than 12 months of cash, founders need to increase their runway, and they should not be hung up on valuation until they get to at least 18 months of cash. If you have 18 months of cash in the bank, then I think you can hold off on fundraising if you're worried about the markets and the valuation. But if you're if you have less than that, the whole thesis around startups is that your slice of the pie may go down, it may decrease, but the pie increases at a much higher rate so you'll still be fine. The much more serious threat is not your valuation, it's your viability to survive and cash is oxygen. If you don't have cash you will die. So, you need to have cash and the countervailing thing is that even though the valuations may seem low now, your competition is probably less now your too, your talent is probably more grateful to work for you right now, and when the markets pick up you're probably going to be a part of the multiple that is higher than you objectively probably deserve. So, these things tend to cancel each other out.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
RB: For our core accelerator we have 18 LPs. They're all strategic and I don't know if that's that it's a fair comparison because we don't admit anybody into the accelerator who's purely financially driven. Everybody that we choose to invite in are co-creators and building out this ecosystem for enterprise startups to succeed. Their objectives are different than I think a traditional fund LP.
Having said that, we have our follow-on fund, which is a separate vehicle, and that is like a traditional VC fund. We're trying to outperform and do better than other pure funds and the first objective is to make money. And I don't know if we have enough experience to comment on this because, frankly, we need to fundraise for that fund.
We do have a differentiated value proposition because we have the accelerator, but I also think we're highly unusual for traditional LPs who are probably used to backing GPs who have a certain track record from traditional fund models. We're building a more emergent fund model that is less known.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
RB: It’s the network that has been built around the accelerator. The big differentiation for Alchemist is that we have developers on our team that are building software for our founders, and we have built what we think is the largest network of all the influencers in the enterprise space of any organization in the world. There's over 26,000 people in the network, across all these different things that are critical for founders. We have 7,000 VCs in the network, we have corporates for if you need customers that you need to sell to. If you want to have office hours with mentors, most VC funds will have like five partners, but we have 4,000 mentors and 80 that are the equivalent of partners. We think we have the largest collection of enterprise founders that have built businesses worth $100 million dollars or more available as mentors of any organization. So, that is a huge competitive advantage to the companies that we end up funding. It's even bigger than what most VC funds offer. That's not to be disparaging about the VC funds, it's just that it's rational that most VC funds are limited by the Rolodexes of their individual partners, which is the rational thing for them to do. Because of the scope and scale of what we've had to do, we've been forced to build out this platform, and now it's become much bigger than we ever expected and it's a real competitive advantage.
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?
RB: One is LaunchDarkly and they are doing feature flags as a service. There's this new approach to developing software where instead of trying to figure out what the best feature is, you just test it. It's very difficult to actually pull that off and they have done it. These founders, when they were the program, were far more exceptional than they would first appear when you just talked to them. So, that's one thing that we already knew.
LaunchDarkly started the company in Alchemist. It was a different name when they were in the program, and they iterated and built these products so quickly that when we looked at the user reviews, they absolutely loved what they were doing. So, what we noticed about them was the engagement of their product was just off the charts, and we knew that the team was just relentless. Edith, who's the CEO, she runs ultra marathons; she'll do 100 mile runs over a course of a weekend, not like a mile, not 10 miles, she'll do 100 miles, and you don't understand the drive that she has when you just meet her. The nice thing about the accelerator is that we get to know them for six months, and when we sat down with her again we realized that she's an unusually gifted human being that's far more than what people would realize. We love things like that because there are things that will be missed over by a typical Silicon Valley VC. So, we already loved Edith to begin with. Then, when she graduated from Alchemist, she got funded by DFJ, which is now Threshold, and Josh Stein led her round. I think very highly of Josh and in his investment track record and so we chose to invest alongside them. They've now raised over $120 million, Bessemer and a bunch of others followed on. So, that was the people plus the VC who is validating our hunch about why we like that company.
There’a also Rigetti, which is doing something that's really a bold play: they're trying to build a quantum computer. Their first round was Andreessen Horowitz and it was a good check for a first round raise, and we chose to invest in them because the technology we thought was deeply disruptive. It took them a while before they got Andreessen’s check, so we had worked with them for a year and a half, not the typical six months, before they did their Series A raise. Over the course of that time we got to see how Chad, who is the CEO, operated. There's this relentless quality that our best founders have had, where they will just get things done, and Chad had that as well. We also were just incredibly excited about the promise of the tech. People would question whether or not this is a venture-backed opportunity or like a research project and when Andreessen came in with a validation of its venture worthiness and so we co-invested too. They’ve since raised $200 million since Andreessen invested.
The last one I’ll mention is Doxel, which is building AI for construction productivity. This was a two person team at the time, all first time founders, and they're in their 20's, so they're fairly young. They were originally building a drone for construction, but they pivoted towards more visual AI. They had only one customer at the time when they got funded. What this goes back to is that we are ultimately driven by the teams and the VCs. So, this founder is a phenomenal double threat. We love technical founders because they can build the products quickly, and then we especially love double quotes, people are both technical and can sell, because the biggest differentiator you have as a startup over an incumbent is your product cycles. So, the CEO is this guy Saurabh, he's relatively young, he's relatively unproven as an entrepreneur, but he has this amazing ability to both sell and also build products. It was one of the things where we saw him iterating really quickly, Andreessen did a Series A check and we co-invested alongside of it because of the caliber of Andreessen’s diligence along with our view of the team.
VN: What are some lessons you learned?
RB: For founders what I would say is: go big. It's actually easier if you go bigger; you're not going to work any less hard if you go after a small market. If you've talked to a founder that is not doing well, they're not working less hard, they're working harder. If the founder is going after an easier defined problem, or an easier to define market, it's still hard to be a startup. So, if you're going to take the jump and do entrepreneurship, you might as well go big because you're going to be working hard either way. And if you go big there's more resources that you can get since it's easier for a fund to write a big check into a company that has huge ambitions. Those are the companies where capital can be deployed. In a weird way, if you go after something more conservative, it'll be harder to get capital, because these funds are predicated upon making sure that they're backing things that can become worth a billion dollars. So, that's the first lesson, that, strangely, your life will be easier if you think bigger. It's actually more difficult if you think in a more limited way.
The other thing that might be helpful for founders that I learned from VC is, the best way to know who a good investor is to talk to the other founders that that investor has backed. The same also goes for accelerators. So, don't listen to what the media hype is about a brand name investor or accelerator, or what that investor or accelerator tells you; the best way to know if somebody is any good is to talk to the founders that they have backed, and you should ask them to be introduced to those founders. When they introduce you to those founders, then go and find the other founders that they have backed that they did not introduce you to and get their advice on that investor. Find out how an investor acts in bad times. That's as important as how they act in good times.
VN: What excites you the most about your position as VC?
RB: Oh, it's the founders. I love founders and I have a soft spot for founders that are doing crazy things because they really are heroes. They inspire me and I aspire to be more like our founders because they're really putting their livelihoods on the line for a mission they believe in. So, mission-driven founders, people who are doing something where they couldn't be a founder of any other startup, those open my heart and inspire me to do one myself.
Today I have a conversation with the CEO of a company called SmartBin, which is a team of brothers that have really dedicated their lives to reducing waste on consumer packaged goods. They've built this contactless way to get out goods, they're building smart bulk bins, and it's taken a lot for them to build this thing up because it's not a typical thing that Silicon Valley likes to fund. Ut's hardware, you have to go and instrument this at all these stores, and it'd be so much easier for them to build a software startup, but they really want to change the world. They really want to make the world a greener place and they believe that the biggest impact on their time is to reduce package packaging. This is also a great story in the COVID era, and I think COVID is going to bring wind to their sails, because now we understand the value of getting goods in a contactless way.
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?
RB: We encourage all founders to apply to Alchemist. We are very people driven, and if you think you might be interested, just apply. Even if you get an interview and you don't get in, we’ll still get you feedback and we always love to stay connected to any founders that are interested.
One other thing: we've launched our program in Europe, so now we have a whole team in Europe that's running Alchemist too. We accept people from all over the world, and with our program right now we just bring everyone to San Francisco. Now, if you happen to be in Europe, we also have European-specific events.
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