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Clear Ventures focuses on investing in B2B enterprise software
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.
Rajeev Madhavan is a founder and General Partner of Clear Ventures.
Madhavan brings operational skills from founding, building and running (as CEO) two highly successful companies. He has the uncanny ability to deeply understand what entrepreneurs are trying to do, and to steer them onto a successful path. He has been a venture investor in over 35 companies. His notable exits include Apigee, YuMe, Virident, Magma, Groupon, VxTel, LogicVision, and Ambit.
Prior to founding Clear in 2014, Madhavan founded three successful startups. The most recent, Magma Design Automation, became the 4th largest Electronic Design Automation company in the world under his leadership. He served as Magma’s Chairman and CEO from when he co-founded the company in 1997 through its acquisition by Synopsys in February 2012 for $580 million. Prior to founding Magma, Madhavan co-founded and served as President and CEO of Ambit Design Systems, which was acquired by Cadence in 1998 for $280 million. He also co-founded and served as Director of Engineering of LogicVision, Inc.
Madhavan is a recipient of the Red Herring Top Innovator award, the lifetime achievement award at NITK, India and various other awards.
He earned a bachelor’s degree in electronics and communication from KREC, Surathkal, India, and an M.S.E.E from Queen’s University, Ontario, Canada.
When Madhavan is not working he can be found with his wife and two children, trail running, tending to his rose gardens, or holding court with technologists figuring out what comes next.
VatorNews: What is your investment philosophy or methodology?
Rajeev Madhavan: Clear Ventures is a little over five years old now. We were formed with a key focus on early stage investments. I know every VC fund says “early stage” as a line but there's a big difference in what we do: we typically have founders who have just left their current jobs, or we help them move out of their current jobs into a successful startup.
Usually there's a general idea, or if the idea is not very clear we help them formulate it, and we sometimes involve ourselves in going with them to some prospective customers. We leverage our experience and contacts to help the company get access to their early formative customers. For example, last week one of our startups launched the first version of their product; it was an investment that was done about a year ago, in November 2019. We did a seed round, so that one of the founders could leave his current job, the other person then joined in January and they formed the company in January 2020. We basically were funding it before the company was formed. They launched their product, the company is called Opsera, and is offering DevOps as a service. It’s a very unique company; in one year they launched the product, and secured several marquee customers such as Honeywell. During the first one year, they did not have a product manager, they did not have people to reach out to customers, so our role was to help fill those shoes as well as organize their fundraising efforts. We basically became some of those missing resources for the company. So, our methodology, our desire, and interest is to participate in the very early stages of a startup’s life.
We write anywhere from a $400,000 check up to $6 million in the first round, depending on the complexity of the project. The reason for the large range is that some projects require hardware or a larger team and that determines how much money the company will need to get to the first product and early customers. We’re focused on mostly enterprise customers and products. We have one direct-to-consumer company, but the rest of the 20 companies we have are all targeted at B2B enterprise technology and some of them have hardware solutions as well.
VN: I'm interested in one thing you mentioned, which is that your focus is on people who are either leaving their jobs or have left their jobs. Was that a gap that you saw in the market that you wanted to fill?
RM: It is a gap, as well as it's the core strength of the Clear team. I came to the valley in 1991, and in ‘92 I did my first startup. I just finished my Master's, spent two years in a big company, and then got into the startup phase of my life and I’ve done four successful startups. 2 of them were IPOs and 2 others were good acquisitions. That experience of growing from zero to a company of scale is one of the unique differentiations we have. We have been on boards. or run companies, which have had revenues of one billion dollars a year. Clear Ventures co-founder Chris Rust was on the board of GoPro. We have seen companies grow from that very early stage all the way to consequential public market IPOs. That early stage is where we differentiate from many VCs with MBAs. This is not meant to be offensive to them but many of the MBA trained VCs have no experience in forming and running companies in the early stages.
VN: You said you focus on enterprise. What verticals within enterprise are you specifically investing in and why are those verticals exciting?
RM: We’re not a thematic oriented venture fund, like an AI fund, etc. We pretty much look at any area in venture. To give you an example, healthcare is on the cusp of leveraging AI/Machine learning for genomics and proteomics. We intend to pursue applications in this space but will look to avoid anything that takes FDA type approvals, because we think any startup needs an element of luck to succeed and to have Uncle Sam's blessings requires even higher elements of luck.
Applications of AI, IoT, edge, enterprise infrastructure software are key segments that we have already invested in. This includes some hardware centric investments as well. The next wave will include enterprise companies that will leverage these technologies to usurp existing markets or define new markets. In summary, it's much easier to say what we don't do.
We think that venture is one of those businesses where you cannot be tied to themes because themes come and go. During a transitionary period, there may be a focus on themes. For example, in the Clear Fund I, we invested a lot in enterprise software that allows for easy development of software for cloud native applications. Clear Fund II will focus on using those tools to build the next level of abstraction higher up in the chain. i.e. Fund II builds on top the foundation that has been laid by Fund 1 companies.
VN: What's the big macro trend you're betting on?
RM: Right now, the macro trend is meaningful applications of AI and machine learning. I'm not talking about AI infrastructure, that's a given; everyone knows how to use tensor flows and related. That's no longer a differentiator. The question is what you do with those tools to create a new market, or take existing markets and turn them upside down. For example, what Snowflake did to Oracle, the next stage of companies will do to Snowflake using AI. There's a great opportunity to create the next level, which is built on the fact that data is everywhere. How do you extract data efficiently? How do you use the data to make an existing business irrelevant or create new businesses?
Every first wave company in this space will be challenged. For example, in robotic process automation, the first few companies were all scriptware, and many will have or had successful IPOs, but if you look at their core software, the amount of AI is very little. They added the AI jargon post the company gaining traction. So, the next level will be built with AI applications from the ground up, so it will have a lot more implications of what it does to segments like that.
VN: What I feel like you're saying is that existing companies are trying to put AI into their pre-existing software, but it's not going to work as well as if you have AI built in from the very beginning, like these new companies will.
RM: Yes. This requires a cultural shift. Some of these existing companies are sitting on a ton of data, but don't know what to do with it. The ability to change your own methodology and existing business models based on applications of AI is going to be very interesting.
VN: It can be very difficult for those big, established companies, like an Oracle, which have been around for decades and decades, to make that transition in the way that a startup can.
RM: Some of them are still making the real transition to SaaS licenses in the first place. Their definition of SaaS license seems to be, “Let me use the same software I had, I’ll just do the maintenance for the customer,” which is completely upside down to what it should be. The software has to be made much simpler in order to provide a real SaaS value proposition. For those companies, climbing the next wave with applications of AI from the ground up is too difficult.
VN: What is the size of your current fund?
RM: The fund has already raised about $330 million. We now have about $180 million for our new fund, which we are operating out of, that’s Fund II. We also have an opportunity fund of about $35 million also available. So, we are operating out of those two funds today.
VN: You talked about being in the early stages, and it sounds like some of the companies invest in a very early stage. Are we talking like an idea on a napkin?
RM: Yes, most are, except one of 20 companies in our list. One had some customers; everything else was on napkin ideas or white board presentations. The presentations, I can tell you, have changed, and many of their products have morphed through time and process.
VN: So it doesn’t sound like the companies you invest in will have any traction.
RM: Traction is almost zero when we start so we have to get in and understand the market. That's a very important aspect of what we do. The team as a tangible asset is what we look for. Can the founder recruit the team? Can he/she bring the right players into it? Is he or she capable of building the entire business leadership as well as the technical leadership of the company? However, above all, the market is the number one thing that we spend time on. Should we play in this space or not? If there is a category already created, chances are we are late, and we’re not the right investors. We want to be a year or two ahead of a category being created.
VN: What's the diligence process for determining if there is that market. Especially if you're getting into categories that don't exist yet, how do you make that determination?
RM: We work with the team, and we go to 20 or 30 customers, though sometimes five or 10 is enough, to see the reactions of people who could be their customers. I am almost a sales guy, trying to help the startup sell this idea, to see what the reaction will be. There's nothing better than seeing a potential customer’s eyes light up, even though we haven't delivered the product. Just to see that kind of reaction is the most important factor in the decision we can make!
We can also help the founder find other co-founders or founding employees. To do this, we actually have built software to help them identify the best possible talent. We also observe how the founder is making the recruitment decisions. Is he or she willing to share the equity and bring in the right team members? Or is she or he all about keeping all the shares to himself? All of that plays out in just one or two months of working together with the founder.
VN: Let's say you determine that there is not a market for this potential product, what happens then?
RM: Sometimes, we try to redirect the founder to a different market with greater potential. Especially if we determine the founder has the capability where he or she can build a team. If he or she has demonstrated that through that process, and becomes very close to us, then we will find an opportunity and work with them. We are even willing to write a seed and work with them as an Entrepreneur-In-Residence and get them to that stage. We offer that to founders who are exceptional. It may be a small seed check so they can leave their jobs and start finding the fit. Especially, if he or she has demonstrated they can build a team, and is a great product builder. So, we get to know them through the process. And if during the process we realize they are not leaders and can’t create the team, then we would not proceed. It is possible that this person may be useful in something else that we are doing, and we attempt to help them meet our other founders.
VN: So, you help them potentially pivot to different products, or different markets, something that would be a fit.
RM: Yes, out of our 20, five or six have pivoted from the original story they came to us with. There's no doubt about that, it happens routinely.
VN: I do a column called When They Were Young and it's surprising some of these companies you find out that they're completely different products when they started, they were in a completely different category. Slack was a gaming company before they were Slack.
RM: The good founders are the ones who are capable of doing that. That's the bottom line. That’s why I'm looking for the founder and his/her ability to bring the right team together that can adapt.
VN: When COVID was first hitting, there was a lot of fear that companies wouldn't be able to raise money and that venture capitalists weren't going to be writing big checks. I don't think that that happened at all. In fact it was the opposite, we actually had a record year last year for venture investing. What’s your view on how that has affected valuations over the last year? Did you see any kind of slowdown, where are companies now versus about a year ago?
RM: You actually brought up some very interesting data, which is that the venture funding was much higher in 2020 than the year before. But, if you look at it closely, the reason is because very large checks have been written for Series D, E, F. In the early stage, things haven't changed much, in terms of valuation range. It's in Series D, E, F, the latter stage of things, there's a lot more money going into that asset class than it used to. However, for Series A and the seed stage, things are about the same.
VN: I feel like those mid stage companies have had a problem for a long time. I remember a lot of talk about the Series A crunch, where a lot of companies would wind up in that bottleneck where they couldn’t raise funding anymore.
RM: Out of 21 companies we’ve funded, all of them have raised an A or B round and most have done Series C, D and some E. There's nobody who's had that crunch in our list. And so, it comes back to that whole aspect of the team and morphing the product to the right market. If the market is not a fit, it does not matter if you have the best team, you're executing a product which does not really have legs, then the founder needs to be flexible to pivot to make sure there is a market fit.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners and to entrepreneurs?
RM: I've been an entrepreneur for 22 years of my life; if I'm looking at the life of an entrepreneur, there are only three things they need from a VC: one is capital, second is access to talent and third is access to customers. With regard to capital; everybody’s money is green and there is not much of a difference in terms of the dollars. Some might say, “I've got more money in the bank and I can write bigger checks.” Well, every fund can tell their own story. We are fortunate to have a Limited Partner base which has about $150 to $200 billion in assets under management. We can bring them in if we need to. In essence, we are no different than others as it relates to capital.
So, let’s look at the two other places where entrepreneurs need help. That is, access to talent, and access to customers. If you look at access to talent, Clear partners have been active as operators in companies, and have built relationships with thousands of engineers; I have about 3,000 to 4,000 engineers that I’ve managed in Silicon Valley that have gone on to do various things in different companies. We can help the entrepreneurs recruit great talent, including co-founders and founding employees.
In addition, we have the relationships with the customers and the CIOs that we can tap into. That is one of the biggest differentiators that we provide to our companies. I still remember my first VC who really helped me, and I remember that more than the amount of money he put in. I don’t remember the amount he invested, but I remember the introduction to that customer. Same thing will be true for the entrepreneurs that I am working with. How can I give them access to customers?
In summary, we are highly differentiated in the talent and customer areas. We build the necessary tools, effort, within our firm, to be able to help our entrepreneurs achieve differentiation in these areas.
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?
RM: I’ll start with Atmosic, where I started the meeting telling the founders that I was probably not going to invest in them because they were in the semiconductor space and would require bigger investments. I explicitly told the founders that the chances of funding this is very low. They had this Bluetooth IoT device which does not need batteries. We all deal with drained batteries on our devices; Atmosic has a chip charged from the ambient RF energy in the air, which means people like me, who forget to charge these kinds of devices, are absolutely saved. Think about the number of IoT devices that need to be charged! If you're an industrial company building an inventory of things that are based on IoT, it's almost like painting the Golden Gate Bridge: you start from one end and go to the other end, start again and repeat. Unfortunately, that's the job of replacing your batteries. This was a company that is looking to change that. 45 minutes into the meeting, I called my co-founder to join me. I told him, “I'm going in, I love David and Masoud, and we should do the seed,” I was firmly on the other side. Of course it helped that David and Masoud are experts in the field, having been part of the early founding teams of Atheros.
They launched their product about a year ago, and they're doing very well. They have about 20 to 30 customers. You're going to see some of these parts appear in the next year. Remotes are the best example: you don't have to replace batteries on your remote!
The second one I’ll pick is a company that came before that called Robin.io. They are growing very fast, doubling every nine to 12 months in revenue, and they’ve become the leader in telecommunications for native cloud applications. Rakuten has built a native cloud implementation using their 4G and 5G stack, all built with Robin as one of the core platform elements. The company went through lots of ups and downs but the whole idea is that you could take any application or group of applications, run it on any cloud, not be beholden to one cloud, and be able to run it on a paradigm of multiple sites. There were a lot of execution challenges, but the company is now doing extremely well and we have been very actively involved in helping them with all of their product definitions and transitions. It’s a very interesting company; they actually had an acquisition offer that we felt was not the right thing, and so did the team, and we eventually walked away from it. We think they can build something big.
The third company I will pick is Opsera. As I told you earlier, we did the pre-seed, allowing one of the founders to leave the company he was with. The second founder was still not yet out of the job, so that took a couple of months, and then after that person came on board we did full funding and got the company formed up and running.They provide the ability for developers and the management to streamline developer operations. Let's say I am one of your developers and you're running the company's engineering organization and you want to know, during times COVID, where is Rajeev in the development stream? What does he need help with? That kind of information is captured and can be used to improve the efficiency of software development. They launched the company and product last week, announced a bunch of customers, and it's been a great thing. They started in our office, they sat in our building, and went through the process, then COVID made it so that all of us had to abandon our offices. However they continued working through the lockdowns and I’m very happy to see them launch their product. Overall, as a developer/entrepreneur, I feel like I get to participate in the creation and launch of many products! That is the fun part.
VN: You said you've been in Silicon Valley since like the early 90s, that you worked at a big company, you worked in startups, you've worked as a VC, so it seems like you've seen it from all different angles. What are some of the lessons that you've learned in your career over the last three decades?
RM: I've really not worked in a big company that I've not formed. The biggest company I worked at was Cadence, which was 800 people when I was there in 1990. I had worked in Canada at Bell Northern Research, which had around 10,000 people, but then I had no idea what entrepreneurship meant. Since then, I've worked in big companies which had become big through growth from the very early stages.
Everybody writes off the Valley. However, the ability for the Valley to morph and move is unique. I mean, take AI as an example; the leading AI application startups happen here first. So, it's a unique place where we have a combination of the right talent. Hopefully we’ll do better on the immigration front to continue what has happened over the last 15 to 20 years. We are a very unique melting pot, with all these unique talents here in the Valley. It is a cauldron where you can put everything together and build this magic potion. It’s a great area and space, so I'm in love with where we live and I love the fact that it's been a great place to be.
VN: What excites you the most about your position as VC?
RM: I can tell you the best and the worst.
The best is, I'm learning things from founders who are experts in their respective fields. I just love the learning process. There was no way I would have learned some of these things. For example, there’s a company that’s into proteomics and genomics, which I knew zero about before I started. I probably know 20% to 30% of what I need to and I'll get to a much higher level because of that interaction with the great founder that we have. That is the most enthralling experience that you can get in this business.
The negative is when COVID first happened, some of the companies got impacted severely. If you're in retail commerce, for example, your customers were dropping off. You needed to control your cost a lot more. That's where it helps to have a very open entrepreneur, who realizes that it's all about making the company successful at the end of the game. This may mean making the right decisions regarding head count adjustments . That's a very tough period of engagement in the VC business. I have to help the founders, explain what needs to be done, and it's a very difficult process to go through. At the start of COVID, there were two or three companies which had to do a lot of correction, but even then they’ve come back because people have been very innovative to the space. The few that acted fast and corrected their models, will have a much better ride after all this is over.
VN: The bad times separate the wheat from the chaff. It's easy to get through the good times, but if you can get through the bad times, if you can innovate and you can weather that, then you’re probably a stronger company when you come out of it.
RM: Correct. However, not everybody has the tenacity and the experience. Helping them to go through that tough period, that drains a lot of energy out of you.
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?
RM: If you are a founder focused on enterprise software, or even direct-to-consumer products, and you're at a very early stage, have a history of great product development, we can help you. Whether it's hardware or software, we have the experience and the background to help build the team, reach customers and help you complete the product and go through the ups and downs of forming a startup. So, if you're in that space, we are it.
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