The Games Fund is a Moscow-based $50 million early stage fund that launched last weekRead more...
The Fund is affiliated with Berkeley SkyDeck startup accelerator and incubator program
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.
Chon Tang is a founding partner of Berkeley SkyDeck Fund.
Tang is an experienced Silicon Valley engineer, entrepreneur and investor. He was formerly founding partner and Managing Director of Junzi Capital Engineering, a quantitative hedge fund investing in the commodity space. He has been actively investing in Silicon Valley startups for 12 years, and has personal investments in over 25 deals with multiple IPOs and exits.
He remains an active member of multiple angel investing groups, and serves on the advisory board of multiple VC-backed companies. Tang is proudly not vertical-specific, and loves to meet visionaries in any space.
Tang is a proud Cal Bear (BS EECS), and also has a SM EECS from MIT.
VatorNews: What is your investment philosophy or methodology?
Chon Tang: Berkeley SkyDeck is the official startup accelerator for UC Berkeley. It's not run by alums, it's not run by friends of the school, it is actually jointly run by a collaboration between the department of engineering, the Haas School of Business and the Office of the Vice Chancellor for Research. It’s funded by the school: they are paying the rent, they are responsible for the content behind the accelerator, etc. Now, that part of the story, I think most of us feel like we've heard before. In fact, about every college campus in America, and probably across the globe, at this point has some kind of a platform like this. It's usually a safe space where faculty or alums or grad students are looking to commercialize either their tech or their talents, and they've learned a lot of things in a class and insight into how to apply it, now they’re going to go build a company and to do that they need some advice, tax advice, legal advice, market advice, and they want to meet some investors. So, it’s very common.
The accelerator itself works exactly what you would expect if you look at YC or 500 Startups or TechStars, etc. It is a program where lots of companies apply to get in there, they come in on the same day, they get a lot of fixed content, amazing resources, amazing lectures from investors and executives, etc. And then, six months later, they'll pitch at a demo day and the fund invests in every single company that goes through the accelerator on fixed terms. That's how it works, operationally, but what's exciting about it is that more than half the companies that we invest in, and that ratio has actually been increasing over time, and we expect it to be even more, are not affiliated with Berkeley before coming into the program. So, instead of purely being a platform for stuffing from campus, it's actually a funnel for talent and technology that want to come to campus. And who are these people? We are going after a pool of founders that are highly intelligent and hardworking, have tremendous potential of building products that can change the world, but if SkyDeck is not involved are largely uninvestable. Who could I possibly be talking about? I’m talking about founders outside of the U.S.
So, that's the thesis here, that's the bottom line. We're building the global hub for entrepreneurship, with two ways in: you're either an affiliate with one of the UCs, so it's not just Berkeley, we're more than happy to work with you if you want to UCLA, UC Davis, UC Irvine and beyond. Or, you're a brilliant founder from France, Germany, Argentina, India, Korea, etc. where, even though you’ve read all the books and you've seen all the tweets, you watch all of the interviews and you know what VCs want and you know what CAC is, you know what LTV is, but because of where you are geographically, your home market, both in terms of the customer, as well as the capital markets, are not able to support you.
VN: You share a name with the accelerator, but you said you also invest in companies from the other UCs as well. So, what exactly is the relationship between SkyDeck Fund and the accelerator?
CT: One slight correction there: we only invest in the accelerator, by and large. There's a few cases where a Berkeley spin out company that didn't go through the full cohort, they went through a different the pathway at the accelerator, we still invest in them, but we're only investing in companies coming from there.
The relationship is that the fund, from a legal perspective, is a completely private and independent entity. We are not backed by the taxpayers; our investors don't include the UC in any way, shape or form. We have a few, but not many, alumni that are investors because they want to give back. By and large, our investors are private sources of capital that want our deal flow. Our financial entities are some of the biggest VCs in the Valley: Sequoia, Mayfield, Sierra, these are our investors. But just to explain how we are tied, though, the critical aspect is, although legally we're different, financially we are not. Half the carry, so that's the 20 percent that we keep upon exit from our portfolio companies, gets donated back to Berkeley via a collaboration agreement.
VN: What are your categories of interest?
CT: If I can say a few words more about how we function, it would dovetail into that question as well.
Why do we give back that carry? It actually ties into how we function and it also ties into the companies that we want to invest in as well. Basically, in the six months that these companies are with us, we're spending all our time, one, on their team construction. There's hundreds of grad students and faculty that will want to work for free with our companies for a chance at joining a team that's likely going to raise venture. Two, we help them a lot with go-to-market and so here is a real advantage for the fund: there's 500,000 Berkeley alumni, most of whom are still in the Bay Area, in every industry imaginable and we turn to them to help our companies. So, think of them as 500,000 co-GPs for the fund.
This dovetails into the question about industries that we want to invest in. We really do everything to keep the tent as broad as possible. Now, in my private capacity before this, as an angel for about 15 years, where I made about 36 investments, while I'm very agnostic, there are certain fields I wouldn't touch. I knew nothing about bio; that is a field that I wouldn't invest in since it’s obviously very technical and if you don’t have the insights then you're not going to do it. But now, every year, I mandated that we're going to invest at least 10 percent of our portfolio into biopharma. I'm comfortable doing that because it's all about turning on the ecosystem. This is not Chon’s fund; that’s really important to point out. This is not Chon’s accelerator. This is a collective effort of 500,000 people and anything that this ecosystem can assist with, that I believe will be venture ready in six months, those are things that we want to invest in.
VN: What's the big macro trend you're betting on?
CT: The macro trend that we are invested in is not a market trend, but a social trend: venture as a way of life, venture as a startup activity. Entrepreneurship is a new way of wealth creation that is spreading globally. So five years ago, 10 years ago, there were many countries on this planet where the idea of leaving a well paying job, and leaving a top school, to work for yourself would have been unimaginable. But now they get it. It's no longer just Israel and the U.S. and China, now it's everywhere. The quality of companies that we see from Armenia and Kazakhstan is strikingly good. The best founders from Kazakhstan are absolutely on par with a lot of stuff that we see from the U.S. So, that's a trend that I'm excited about because, obviously, knowledge is increasingly widely distributed. The one thing that's not widely distributed yet is capital, and that's unlikely to change. It’s easier to build a virtual company, but it is still challenging. So, what I expect to see is that the Valley as a hub for a capital for VCs to meet founders, for founders to meet each other, that's still going to happen. We have six billion people that we can plug into this small hub, but you need people like us to act as that bridge. That is the trend that I'm most excited about.
VN: Even a few years ago if you weren't you weren't in New York, LA or the Bay Area, if you we’re somebody from Kansas City, let’s say, then it was basically like you were in the middle of nowhere. It sounds like that's starting to change and now you can be even halfway around the world and still be able to plug in. How do you source deals from places like Kazakhstan? How you find out about those companies?
CT: This is a somewhat new initiative that we launched late 2017, so we've learned a lot along the way, including that if you have the cure to cancer that you don't have to worry about marketing it. That's my way of saying that there's so much demand, there’s so much pain for these founders, they know where the capital is. They want to come here and they do. They fly out here, they go to events, they use their network, they try to get introductions. Quickly, though, they realize that they're not really getting plugged in; it turns out that handing a business card to do a VC at an event is not that effective. Even if they read your pitch deck, even if they love your market, or they love your product, they love your traction, if they don’t get you or your team, they don’t know your contacts, they don’t know where you went to school, they don’t know where you worked, the sad truth is a vast majority of the GPs out there, at the early stages at least, where team is so important, won't invest. So, they're looking for someone that can help them and they find us. That's my long winded answer.
In Kazakhstan, we have have 90 plus partners now, and it’s usually other accelerators or incubators or early stage investors, around the world who want the same thing: they want to send their companies to the Valley, they're desperately looking for someone that wants the same thing and so we say, 'Let's collaborate, we'll give you some content, we’ll help you teach your companies how to get better. In the meantime, the best ones, send them in our direction.’
VN: What is the size of your current fund and how many investments do you typically make in a year?
CT: Fund I was $23.5 million. We make $100,000 investments in every company and every company gets the same financial deal: we structure it a little bit differently, depending on certain parameters, but it's $100,000 for 5 percent across the board. Roughly half the fund is put aside for those accelerator investments, and half is for the follow-ons. There’s two cohorts per year, 20 companies per cohort, so roughly 40 companies per year. So, after three plus years, we have close to 150 in the portfolio.
VN: What stage/series is that? Is it seed or pre-seed?
CT: It’s hard to get the right label on it. It's not a Valley seed because in the Valley a seed round is now $2 million or $4 million. So, obviously we are before that. For the rest of the world it would definitely qualify as a seed. The right way of thinking about it is: if you haven’t raised from institutional investors in the U.S, you're probably a pretty good fit for us. We have companies that have raised $1 million, even $3 million, overseas, but that doesn't necessarily translate into the same amount of traction here.
VN: What kind of traction does a startup need for you to invest? Or is it too early for that at the stage you’re investing in?
CT: You’d actually be surprised. Roughly a third to half of the companies that we end up accepting each year have revenue and, in some cases, substantial revenue. In our last cohort, of the approximately 20 companies that we accepted, we probably had four companies with close to, if not more, than $1 million in revenue. Again, this is where the opportunity is: companies with real revenue, serious revenue, that should be raising A and B rounds here in the U.S., don't or can’t because they're based in Chile or in Russia. So, that's the profile.
VN: Are there specific numbers you want to see?
CT: Our goal is to make sure that in the six months that they're here, they're going to become investable to VCs in the Valley. So, it's not necessarily a single number; it’s much more likely the quality of the number and the transferability of that company. Investors in the U.S. tend to focus on revenue, so, of your revenue, how much of that comes from customers already in the U.S.? Or how much of this is likely to come from customers in the U.S.? When you think about where we offer the most help, yes, we can help a little bit on product, but our real platform, our real value, the value-add of what we do, comes from the go-to-market piece. If you come in with a product that's ready to go to market, if you’re looking for channels and intros into great businesses, guess what? SkyDeck is perfect for that. But if you're coming in and you still need six months to finish your prototype, I mean, what do you do for the six months while you’re at SkyDeck? You should get that done first. So, that's really how I think more about traction: for us, I’m less interested in an absolute number. If you have $1 million in revenue, that may or may not be enough, compared to the company that has no revenue. I want to know how we can help you get to the next level while you're here.
VN: What do you want to see from the team to make you want to invest?
CT: There's one thing that we've seen in the global team that really works to our favor: the most striking thing about foreign founders is they're not going to quit. They're not casually moving to the Bay Area; a lot of them bring their families, so this is not something that they thought they’d because it sounded cool at a cocktail party. This is their life. The level of commitment and passion, you're filtering for a really unique set of people just by virtue of the fact that you want founders that are committed to moving. So, just by the fact that they’re applying, just by walking me through why they want to be here, I know I've already filtered out a lot of the fluff that most VCs are trying to filter for in the first place.
But, beyond that, I am looking for founders that really understand their customers. That's something that always strikes me more than a founder who understands a technology; if you understand what your customers want, if you've talked to 100 of your customers, maybe you don’t have any revenue, that's understandable. But if you haven't talked to hundreds of your customers, and tried to sell them and gotten turned down, then what do you really know about your business? Was does that to tell me about you as a founder? That's certainly something that I think a lot about you.
Of course, deep tech prowess is also good to have. If you build a great consumer facing app, in Kazakhstan, does that translate to the U.S.? It's hard to say. So, you should have some competitive advantage coming from your technical knowledge background that will translate well into the U.S.
VN: How do you determine that if something works in another country that it’s going to work here? How long does it take to figure that out?
CT: There's no easy guarantees there. I don't know that there is a surefire way of guaranteeing that, but, and I’m sure you hear a lot of this from talking to VCs, it is pattern matching. You're looking for certain profiles or approaches that you know have been highly successful with other venture backed companies that you've seen or invested in the past. That definitely will happen. But the proof is in the pudding. This is where, again, knowing that you’ve talked to your customers, doing your own research by talking to potential customers here in the U.S., that's where the 500,000 Berkeley alumni can also come in and be helpful. That goes a long way.
VN: What do you think about valuations these days, especially since you’re looking at companies from overseas? Has COVID affected them at all?
CT: This is, again, the way that we're so fundamentally different from the vast majority of venture funds. We're not competing with anybody. There's very rarely, if ever, a competing term sheet. Occasionally, maybe, they are trying to decide if they should come to the U.S. at all, because they have a term sheet from investors back in Europe, let's say, and they're going to think about it, but they're not weighing it against our terms. So, we have stuck to our guns, with $100,000 for 5 percent, which is equivalent to a $2 million pre. These are roughly market rates that you see at most of the other accelerators, so that’s helpful.
More important than that, what I look at are the number of companies applying, and the number of companies that accept our offer. We've gone from the early days, when we had a couple of hundred companies applying to each cohort, and from that we picked 20, to now where we're up to 1,800 companies applying, and we're picking 20. Obviously they’re early stage companies, so it's important that I sit here and not obsess about if I invested in numbers 20 and 21, frankly; like, ‘These were the top 20, and I turned down number 21 through 800.’ I recognize that you can’t rank them that perfectly, so I want, let's say, the top 30. As long as I get close to the top 30 or top 40, these are the ones that I believe have the best shot to have that tremendous opportunity to raise that next round in the U.S., and they are going to take our offer.
It hasn't been hard making that pitch because I always tell them, ‘We're not valuing your company at $2 million. I'm saying, ‘Can I make you 5 percent more valuable on your next round? If we manage that, if because you went through us, if because you're able to meet these investors in the Valley, we made you 5 percent more valuable, guess what? That was worth it.’
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
CT: When you're talking about a Fund I, I think we all know that financial investors are very wary of a fund without an existing track record. So, it was incredibly important and fortunate that we could go to these top funds in the Valley and convince them that we would give them access to deal flow that they themselves would not see. When you're a Sequoia, let's say, obviously you see everything, and everyone's going to send you their pitch deck, so it’s a signal to noise ratio for them. ‘I get 10,000 pitch decks a month, I want to know what the quality is. I want to focus my time on the top 50, top 100.’ Well, that's what we do. We told them: ‘Look at all these 6 billion people living around the world. These are companies that' are not really part of your funnel, unless we are involved.’ So, that was the Fund I story.
The Fund II story is much more of a pure financial story because now we do have a track record. We have companies like Krisp, where the founders, who were originally in Armenia, came through our first cohort, gosh, three years ago now. Wow, time flies. They make noise cancellation AI that can be plugged into Discord, and it's also available as an app for your PC, for your MacBook. In the three years since they've come through us, they've now raised $100 million plus.
The story here is financial investors were essentially engaging in arbitrage, and there's two forms of that: the first form of arbitrage just comes from the geography. A company worth $2 million in Armenia is worth substantially more here in the Valley just because they moved. That part is pretty easy to understand. The second part of the arbitrage is, because of how selective this whole thing is, when I get companies that are worth $2 million in Armenia, or even companies worth $6 million in Armenia, and they're still willing to to come in at our $2 million term, they don’t see it as a down round. They're not here for the money, honestly; they're here because they waited and they understand that what we offer goes way beyond that capital. Ultimately, the arbitrage has allowed us to offer outstanding financial returns. We haven't had a down quarter; most small funds, especially in the first quarter, and the first year or year and a half, they're usually down. It’s a J curve and they gradually dig themselves out of that, but we never had a down quarter.
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?
CT: What I really get excited about are these global companies that I think would not exist if it wasn't for us.
I’ll talk about a company called Skyloom, originally from Argentina, which makes optical communication terminals for satellites in space. The thesis here is that they look at RF, radio as bandwidth, for transmitting data back from orbit. As we all know, there's lots and lots of things going into orbit and that bandwidth is fixed. The more that we put up there, the more expensive it’s going to be to transmit data. There might be all of this amazing data available out there and that number is only going to go up, but the amount of bandwidth is fixed. So, clearly optical is the answer. Having a laser that goes point to point in a finely focused way means that you essentially have infinite bandwidth. So, it's a very technical company from Argentina. I certainly had no idea that Argentina even had an industry that worked in this category, but it turns out that the EU has done a lot of their work in space in the country.
The two founders were long term experts in that category. and they had this great vision and they understood the pain point. They wanted to build this company, but they had a real issue: in Argentina you don't have the risk investors who are willing to take a shot on folks who are building a new company in this crazy new venture. And then, in the Valley, you have investors who are going to take that risk, but don't know anything about Argentina. The company was stuck in the middle. So, Berkeley was the perfect platform: they came in, we invested in them and as soon as we invested in them, actually they got a couple of million dollars of additional investment from Argentina from investors there who said, ‘Well, ok, I get it. If there are investors in the Valley that are prepared to back them then they must be a real thing. Now we'll also come in.' Also, at the same time, we provided a ton of talent that connected to some of our faculty deployed into the industry in the Valley. They walked away with ridiculous connections with customers and millions of dollars raised. They were excited to launch last year but, because of COVID, obviously, things have been pushed back a little bit, but they are going to be in orbit this year and they're going to be a part of changing our lives. This is not one of those things where I say, ‘Well, I made money and I got in on good terms ahead of other VCs.’ I genuinely believe this company wouldn’t exist now if it wasn't for us, and that's certainly a very thrilling feeling.
Another company that's somewhat in the same vein is one called 4D Sight. This is one where the founders were originally from Turkey. What they build is a cloud-based platform using computer vision to recognize video as it is being streamed. Then it's able to render things on top of the video. The most common use case is someone is playing a computer game, streaming it on Twitch, they can now layer and add onto a wall in your map. So, tremendously talented technical team, tremendously talented founder on the biz dev side but, again, it's something where everything we did was critical in helping them get plugged in. Our advisors include a board member from Roblox and the former CEO of the Oakland A’s, so these are all connections that we are able to turn on to activate for our founders. All of a sudden, the founder is talking to the NBA and Major League Baseball and UFC and Blizzard and Riot, etc. and he's gone on to do extremely well.
VN: What are some lessons you learned?
CT: I've had a hybrid background. I was an operator, first and foremost. I was actually a founder in the dot com bubble, back in ‘98 through 2000, so I really had the chance to experience it up close and personal. I've been a founder since but I’ve also been an investor. I’ve been an angel investor for about 15 years, I’ve had two of my companies go public. I’ve seen thousands of deals, invested in 36 of them, in that time frame. I also have an institutional fund management background; one of my startups that I founded was actually a quantitative hedge fund, where I was placing thousands of trades into the commodity space every single day through my program.
When I think of it from the point of view of working with early stage startups, I don't know that I would say I've learned anything new in particular. I mean, I learn something new every day, I should say, from each of my founders and everything else. But, I mean, the process of thinking about understanding a pain point that no one has solved yet, thinking about how I'm going to find the go-to-market to really tackle that pain point, I don't think that's necessarily any different now than it has been for the last 15 years for me. But I really, really, have come to appreciate how having an ecosystem and how having a network is the most important thing in venture, and in being a founder. When I was doing my quantifying, I didn’t talk to anybody; I sat in my room and I basically made a printer that printed money every day. That was a lot of fun but when you're a venture founder, you're a salesman every single day. You're selling yourself to employees, you're selling yourself to your customers, you’re selling yourself to investors, and the more allies you have in that process, the amount of value that offers to you is unbelievable.
VN: What excites you the most about your position as VC?
CT: I get an endorphin rush every time I work with a first time founder and I hear about that qualitative next step being taken. So, this is a company that I’ve spent some time with, where I really respect the founders' hard work, and now they've just got that first revenue. Or it could be that they just got a call back from a potential customer that said they love the product and they want to hear more. That's a little high that I always had as a founder, and I get to have that high vicariously through these hundreds of founders that I back every single year. I mean, without a doubt that's a little pleasure that keeps me coming back.
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?
CT: I actually think that venture, as an industry, it's not broken because it serves its role, but it's very antiquated. Venture is essentially the same model as it has been for 50 years. We don't do things very differently from how VCs were doing it 50 years ago and there's something with that. There's a lot of commonly held tenants in venture that I don't necessarily hold. Speaking as a former institutional fund manager, I just have a really hard time with the idea that we're gonna make 12 in investments in a fund, and if one of them turns out to be the next Uber or Airbnb, my investors get a 50 percent IRR on this fund. But, if there wasn’t, they're getting like a 5 percent IRR on the next one, or they’re not even getting their capital back. To me, the volatility inherent in that is problematic.
In the public markets, we’ve moved away past the world where people would sit in front of a room and say, ‘I'm the smartest stock picker in the world.’ That's not what the hedge funds say anymore. The hedge funds say things like, ‘I know how to crunch the right numbers and do the right quantitative analysis and take both sides of the market, so I'm not exposed to market behavior.’ This week it’s kind of hard to make that statement because of what happened with GameStop but, by and large, we can say that the stock market industry has moved on tremendously from where it was 50 years ago. The venture industry is still a bunch of folks who sit on a stage and say, ‘I'm the best deal picker on the side of the Rockies.’ That's interesting and there's ways to improve the industry.
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