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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.
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.
Richard Chan is Managing Partner at Berkeley Frontier Fund.
Chan is a serial entrepreneur and seasoned veteran in the international technology industry. Richard got his CPA license with PwC, co-founded three startups in Silicon Valley, and led product management and business intelligence at Altavista and Microsoft. He founded a cross border VC fund, Ironfire Ventures, in 2013, and has invested in over 70 early stage startup companies. As a food and wine enthusiast, Richard distributes premium California wine to Hong Kong and maintains a food blog with over 1000 restaurant reviews.
He received his bachelor and MBA degree from UC Berkeley.
VatorNews: Tell me about the Berkeley Frontier Fund. What is your thesis? What is your methodology is, and where does your fund fit into the ecosystem?
Richard Chan: What we are doing is very different from the typical VC approach; we call it a new breed of VC plus philanthropy. So, we have this mission, a double bottom line way to approach the VC market. Of course, when you need to make a donation, you have to have a strong investment model to begin with. We started with this model back in 2019, when I hosted a dinner with Berkeley alumni leadership in Hong Kong, where I learned that the financial situation at Berkeley is very challenging; state funding is down to 13%. We just asked, "as alumni, how can we help?" Of course, most of us are donors to Berkeley but our donation budget is not that big, so what if we could tap into the investment budget of the alumni and have investing in Berkeley become part of your asset allocation? That is where this started. Fast forward about two years, we did all the legwork and we found a model that will work for both the LPs as well as Berkeley.
We are now an official Berkeley VC investing in the best Berkeley startups, and when we make money, we donate a significant portion back to the university. So, that's what we do in a nutshell.
VN: Can you talk about the relationship between you and the university and how that works?
RC: We have the official rights to use the name, so there’s a licensing agreement. We work with some of the leadership at Berkeley and then we also have an official donation arm of the Berkeley Frontier Fund that is connected to the Berkeley Foundation, which is a special LP in the partnership. So, for every $100 we make, $30 will be automatically donated right away. So, it's not like you have to do your charitable contribution and all that; we donate right away. And, even better, we have a very unique feature where 5% of the committed capital is our initial donation to Berkeley. So, what that means is that if you commit $100 into the fund, we’ll make a $5 donation to Berkeley in the first year.
VN: What percentage actually goes to Berkeley in total?
RC: 30% of the profit.
VN: That's quite a lot.
RC: We donate half of the carry share to Berkeley, so that's 10%. But then, for every dollar the GP donates, the LP will match it for $2. So, together, we'll donate 30%. That's how the math works.
VN: You're obviously investing in Berkeley alumni and Berkeley startups but are there specific categories that you're looking at that are more exciting to you? Or are you more of a generalist fund?
RC: The big category is what we call frontier technology. So, anything from deep science to Berkeley research; Berkeley spends over $1 billion in research every year, and some of them will come out of commercialization. We're seeing a lot of startups in biotech and we see a big chunk in AI, robotics, and material science, as well as blockchain-related technology. Those are all the categories that we’ll focus on, which means that we're probably not going to invest in social networks or B2C type startups.
VN: Are you investing in students, people who are currently enrolled at Berkeley? Or is it only alumni? Or is it a combination of the two?
RC: It's a combination of students and alums, as well as professors. So, far we've invested in four companies: Databricks; we invested in Mammoth Biosciences from Professor Jennifer Doudna; and we also invested in AyarLabs, a hardware company. The latest one we also did is Neuona Therapeutics, which is actually a joint venture between Berkeley and UCSF.
VN: So you will invest in software and hardware?
RC: Yes, we do.
VN: Because a lot of firms avoid hardware, I think, because it's more time and capital intensive, but you don't mind investing in those startups.
RC: Part of it is because we're only investing in the late stage or growth stage. The reason why we pick that is because we have an entryway to invest inthose deals. Some of the startups actually license Berkeley’s IPs, so Berkeley has investment rights, and then we just pick the right timing to invest in those companies, especially those that are past that product market fit phase and into early growth, or even late growth. We invested in the very late stage rounds for Databricks.
VN: If you had to define the macro trend of what you're investing thesis or what you're investing in, how would you define that?
RC: Any science that is going to break through, that’s going to disrupt the market or create a new industry, those are the ones that are the most exciting for us. Usually those require a lot of back end research to build. Just like how Intel developed their technology and then became a company that changed the world, there’s a lot of deep science behind those and those are the ones that we mainly focus on.
VN: What's the size of your fund? How many investments do you make in a typical year?
RC: Our current size is $50 million, and we will make about four to six months investment per year.
VN: What does that turn out to be in terms of dollar amount? In initial capital and also follow-on.
RC: In initial capital, we do probably about like $2 to $3 million per check. And then follow on, we also will allow LPs to co-invest with us, so we will do SPVs as well.
VN: You're investing $2 or $3 million, but you said you're vesting at a late stage, so that doesn't seem like a huge amount in terms of the stage of the company.
RC: A typical pitch would be, say you’re a very successful founder, I will talk to you and say, “I know you're a proud Berkeley alum, you have a successful company, and I know you're raising a big round next round. Save 5% for Berkeley, so you're donating the opportunity to Berkeley. When we make money, and we make donations, we name them after you and your company. So, save us that 5%.” That's the $5 million.
VN: It seems almost like your pitch is, “help out the university. You have the opportunity to give back to the place that gave you an education and started your career, etc.” Is that how you're approaching it?
RC: Yeah and, so far, we have 25 founders who have invited us for their next round of funding.
VN: Why, when you make that pitch to them, is it so important for them to give back to Berkeley?
RC: I guess, when you're successful in business, at some point, you will start to think, “how do I give out my wealth?” At some point, you will have to think about giving back, and the natural place where you first give back is the university that you went to. We want to be that conduit for the students and for the alumni to think about, when you're successful, can you give back to the school? Especially now that Berkeley is in a very challenging situation. Historically, Berkeley's not very good at fundraising, so this is a new path, besides making a donation, to give back to your school. We're opening up new doors for people to give back.
VN: I didn't know that Berkeley was in a bad financial situation. Is that widely known or is that something that they're not really publicizing?
RC: Amongst alumni and people who are close to Berkeley, most people know about that. I guess everybody looks at the severity differently. You probably heard recently that Berkeley has to cut back on the incoming number of students and all that, so it really hurts.
VN: You said you're investing in late stage growth stage companies, so I assume at that point those companies would have traction because they've been around for a while. So, what numbers are you actually looking for in those companies? Is that something that's important to you?
RC: Absolutely, revenue is one important point. So, you look at the diversity of revenue, you look at if they have recurring revenue, and you look at the growth rate. So, not dissimilar to any other VC looking at it. And it’s also important to also have market adoption into their products, and if it's growing. We’re really pointing at what is the right timing to go investing in these companies. Typically, I would say, right around Series B or Series C, that's probably the earliest that will invest, but will also invest in a later stage, as well, because valuation is not a big issue for us, per se, and we're optimizing for early exits.
VN: Do you actually have specific numbers that you want to see? I know that can vary based on the stage but also what kind of company it is, the space that they're in, but do you want to see a minimum ARR or minimum number of customers?
RC: It really depends on the industry. So, for biotech it would be a little harder to look at the number of customers, but if it’s hardware, for example, do they have existing customers? Also, orders and pre-orders and all that. I don't know if there's a particular number that we're looking for, but you have to have enough traction. Also, we talk to the lead investors and subject matter experts: what would be the tipping point of you passing through what we call “the valley of death”?
VN: What do you want to see in terms of the product? I know that's a tough thing if you're talking about a biotech company; it's not like a consumer app where you could just download it and check it out. So how do you determine if the product is good? If it's a viable product?
RC: There are several things that we typically look for: number one is, what is your value proposition? And does this value proposition have a large enough customer base? That means, how big is your TAM? And then what is the current tracking you get towards your TAM? Can it be validated early on? Once you have at least a year or two years of data, then we will be more comfortable doing the projection. So, typically, if you have two years worth of strong growth, either in customer base or technology milestones that you hit, that's the early signal that we look for. And if we don't feel that is strong enough, then we wait for the next round.
VN: What about market fit? How do you determine that? What's your due diligence there?
RC: Most of the time, you look for the number of customers, and you also look for the type of customer, the type of contract that they signed. And then you look at if people are recurring customers, and are they growing in their orders? So, those are the key factors we look at. We look at the diversity of customers, so we look at multiple factors in the financials.
VN: For this column, I usually talk to people who are early stage, sometimes pre-seed or seed. For them, the team is very important. At the point where you're investing, is the team still important? I know that you want them to be Berkeley alumni, obviously, but are there other intangibles that you want to see from those founders and those entrepreneurs to invest in them?
RC: Of course, the team is super important; that's the number one criteria for us. That's why if you look at the four companies we’ve invested in, they are superstar teams, like Jennifer Doudna, who is a Nobel Prize winner.
The number one thing we look for is their ability to hire, can they attract great people? That's one of the most important parts.
VN: Talk to me about valuations. You said that that is not really important to you but, obviously, we're all seeing valuations go sky high for the last couple of years, especially. How have you seen them evolve in the last couple of years? Where do you see them going next? What's your opinion on the market in general?
RC: Valuations are mostly market driven; especially if we're not a lead investor, that's not a lot that we can do. So, that is a factor that is really difficult for us to adjust but if that's the market price, what people are willing to pay for, and this is a strong team, it's just a matter of, are we buying it a little too early or a little too expensive? Which is fine, as long as the company is a strong company. I can buy Apple stock or Microsoft or Google stock 10 years ago, when it was high at that time, and still do well. The most important part is, is it the right company?
VN: You’re a $50 million fund, do you find that sometimes the valuations are high enough that you get priced out of a round? Is that something that happens?
RC: The good thing about it is a lot of our LPS will do co-investment with us in every transaction. So, if we can get a $30 million allocation, we'll distribute the spill over to our LPs to co-invest. So, this is not necessarily a big problem for us. Essentially, we're looking at investing probably over $100 million worth of dry powder.
VN: Valuations are going up, but do you feel like they're going to come down soon? Do you feel like we're in a bubble?
RC: We’ve already seen some of the valuation that came down 30 to 40%. I expect that it is probably not going to be a uniform curve: some companies will come down a lot more, but the strongest companies probably will still demand a pretty significant premium.
VN: Coming down that much, what effect does that have on those companies? If they've raised that big round, and then their valuation falls 40%, they're obviously going to take it down round.
RC: As long as a company is strong in their traction, their market adoption, and all that, it just means that valuation is an art, it's probably not as much as science. If you have a long horizon to look at, it’s a blip in their history that an investor probably overpaid in this round, and then, in the next round, they probably became more reasonable and back to the normal range. Then you look at like a few more rounds later, or even when the company goes public, that is when the real test is going to be. So, I'm not so worried about it, especially if we have an option to hold on to the stock if the company goes IPO.
VN: A lot of VCs I've talked to have described it as a bloodbath; that’s the word I've heard a bunch of times. It's almost like you're saying that the good companies will survive, and the bad companies won't.
RC: That's right. It's a matter of selection, too, but you're absolutely right. If people already have a lot of holdings in the company in their existing portfolio, then I’d worry but we are starting anew right now.
VN: Let's talk about your differentiation. We talked about your LPS a little bit. Who are your LPs? Are they the same ones that most venture capitalists go after? Or are they different?
RC: They’re different: they're all Berkeley alums. They're, composed of family offices, also successful entrepreneurs who have exited and want to give back to the ecosystem.
VN: What's your pitch to those LPs? Is it what we talked about before, them giving back to Berkeley? What else do you offer them?
RC: I didn't put the giving back to Berkeley part as the primary reason to do that; the primary reason is you are investing in the best Berkeley startups. We have an opportunity to invest in these startups, one, because of the contractual agreement when they licensed Berkeley IPs, so we can get into those deals. And, second, is the part that we talked about, getting them to feel like they want to give back to the school. So, there are like two different ways for us to try to get in.
At the end of the day it’s like, “Do you believe Berkeley has great startups?” I'm not saying that Berkeley will have 1,000 startups that are all going to be successful but if you can select the top 10 out of the 1,000 startups, you look at historical data, and we did an analysis, you're going to have a pretty decent return.
VN: What's the pitch to the entrepreneurs? Entrepreneurs have a lot of options at this point, they can take money from a lot of different funds. So, what's your pitch to them?
RC: For them, we primarily focus on the Berkeley founders and we tell them, “when your company makes money, it doesn't cost you anything to let us in, but we actually give you the recognition when we make the donation.” So it's a win-win. And, hopefully, that will help us get on the higher priority in the long list for those like super hot companies. We got into Mammoth, we got into AyarLabs, both through those methods.
VN: You've talked about a bunch of the companies that you've invested in, can you tell me what it was about those companies in particular? Like you said, they’re the top 10 out of the 1,000 that come out of Berkeley. What made you want to invest in them?
RC: If we want to pick a bet into the newest technology and CRISPR, I believe that Mammoth Biosciences is one of the top companies out there, and it’s a Berkeley company. So, that's almost a no-brainer that we want to take a bet there. For databases, if we want to take a bet in that sector, there's Snowflake, there's Databricks, and a few other ones, so Databricks seems like an obvious choice for us. So, we actually went down the list of all the Berkeley founders, we crawled the web, we found it's about 600 companies in our pipeline and we reached out, starting from the top valuation and traction companies.
VN: How do you find them? Do you just do a LinkedIn search? How do you find these companies to begin with?
RC: We looked at LinkedIn, PitchBook, CB Insights, and all that to find the founders. We also talked to professors, talked to the Dean. “Who are the companies, who are the people that you heard of that's doing well?” Over the past like nine months, we collected all this data and we started reaching out.
VN: To tell me a bit about yourself. Talk to me about your career, and how you started, how you found yourself in a venture. Why is this something that you wanted to do?
RC: I am what is called a “double bear," meaning I did undergraduate and also business school at Berkeley. I've worked in many different industries; I started out as an auditor at PwC and got my CPA license. I worked in the wine industry, and I made wine for four years; that's actually a side job, that's a passion of mine. And it's very fortunate because in my first job at PwC I audited wineries. Then I did three startups myself, went back to business school, and I joined Microsoft after business school for about eight years. I was first at the Bing search engine, and met a lot of great people there, and I had the opportunity to actually move to Beijing with Microsoft and also help out with Microsoft Ventures there. That really reignited my passion in going back to the startup space.
I founded Ironfire Ventures with my partner Jackie in 2012. So, I’ve done venture investment for about 10 years. Because of COVID, we really had to rethink what we want to do in life. It's a calling, and it just makes sense for us to take on this challenge to make a difference, especially something very meaningful for me, giving back to Berkeley.
VN: You said you've been doing venture for a decade now, I'm sure you've learned quite a bit over that time. So, what are the top two or three lessons that you've learned in your career?
RC: There are many, many lessons. The important part for me is that if we're optimizing for donations, so we shouldn't do early stage, because it takes a really long time to get capital back. That's part of the reason why we want to do later stage. The other big lesson is, do you have access to the best deals? So, how do you get access to the best deals? For us, we carved out this niche of Berkeley startups and that would be our niche to get into them.
VN: Are there other universities that have something similar to your fund? Or is it very unique?
RC: I believe it's very unique. I tried to reach out to many different universities, like Stanford, MIT, and all those universities, but I couldn't find anything like this.
VN: Do you feel like maybe this is something you'll try to replicate with those other universities? Do you want other people to look at your model and say, “I could do something similar”?
RC: That would be great. I talked to one of our advisors, Rich Lyons, and he mentioned replicating this model for all the UCs, which have similar challenges with the funding situation. Can we do one for UCLA? Can we do one for UC Davis? It'd be very interesting to see if this can replicate into other universities that have the same challenges.
VN: It seems like it would be more focused on state universities rather than private ones.
RC: Right now, I guess, because the state universities have a bigger challenge now. I'm sure all universities have challenges as well. We’re still learning, so if there are any other universities doing a great model, we’d love to learn.
VN: What's the part of the job that you really love when you go to work every day as a venture capitalist? What's the thing that really motivates you?
RC: Now, it's all about the meaning. In the past, with venture capital, you tried to maximize your return to your LPs. That's the number one criteria. But now, my LPs include Berkeley. That's a part that is meaningful, and is a major driver for me to wake up every day and do this. It’s a calling, it’s my come to Jesus moment.
VN: Is there anything else that you want people to know?
RC: It's more important than just myself. In order for Berkeley Frontier Fund to be successful, we're very fortunate to have help from school leadership. We have three Deans on our advisory board, we have department chairs, we have a lot of successful alumni helping to drive this forward. So, I'm just the first gear to try to move this forward and this is a big engine. This is a truly alumni driven initiative. You invest in Berkeley, we return some of your gain back to Berkeley, and this has to go in the right balance to make sure all your stakeholders are happy.
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