TX Zhuo joins today to talk about starting Fika with Eva Ho with the goal of giving back to the community.
TX has an amazing story of dropping out of school to start his first business and how his approach to investing is evolving as the venture market evolves.
So happy to be here with my friend TX Zhou today. TX is a partner at Fika, a boutique seed fund investing in data, AI, and automation. TX started Fika after previously being a founding partner at Karlin Ventures and before that at Innovation Endeavors. I’m excited to hear all about that and also his own very impressive founder journey. Hi,TX. Good to see ya.
Hi, Minnie, thanks so much for having me, it’s a real treat to be able to chat with you today.
Yeah, it’s fun to catch up. So let’s start with Fika and then let’s get some of the basics and then let me jump into all the exciting things about you.
Of course, of course. I started Fika in late 2016, fund one was a $41 million fund. We’re based in LA, but an interesting thing is that all of us used to live in San Francisco, so we’re all transplants to LA. About 50% of our investments are focused in the Southern California region. We’re predominantly a B2B fund. I’d say it’s about 60% of our investments, but we cover FinTech and marketplaces as well. We started investing out of our second fund, which is $77 million in late 2019.
Got it. You know, you said B2B, FinTech, and marketplaces. Are there certain areas that you tend to focus on?
I mean, to be honest with you, we used to be generalists across these three sectors that we focus on? But we decided as a team that we needed to go deeper in these three verticals. So right now I cover a lot of our FinTech investments and then within enterprise software, I cover a lot of our horizontal layer. So anything within dev ops dev tools, security will fall under my purview. And Eva tends to cover more of the vertical SAS plays.
Interesting. DevOps always seems quite technical, were you technical in, in your education?
Not at all Minnie, this was completely accidental. I think back when I was at Carlin Ventures, we ended up investing in quite a number of dev ops companies. So we invested in companies like video and we invested in companies like Cyril Secure and Privately. And sort of over time I created my own thesis for investing in these spaces.
Can you share some of those theses?
Yeah, of course, of course. So I think a couple of themes that we’ve been in focus on lately, I think one of them is the collaboration between engineering and security teams. So I think there’s this constant friction where engineers want to release a product as fast as possible. And then security teams are concerned about going too fast without having the right levels of security and visibility. So we’ve been focused on finding tools that can bridge this gap to provide the InfoSec teams with the right level of visibility that they need, but allowing engineering teams to go as fast as they can. And then the other, theme that we’ve been focused on, I think specifically to the FinTech ecosystem, it’s around the KYC and AML AML space.
Um, I think we’ve seen the rise of crypto platforms, which has made it very interesting where, we, we now have a lot of platforms that need to know their underlying customers and clients. So we’ve been focused on tooling in the space in terms of platforms that will allow enhanced due diligence that will help with EML, which will help with KYC.
So that’s been themes that I’ve been focusing on over the last six months.
Hmm. Um, I had some question on that. Uh, Oh yeah. So do you proactively seek companies there or are you just sort of putting yourself into that ecosystem?
Actively try to seek it out. So, um, I try to do regular calls with PMs engineers at sort of larger companies where there’s companies like amplitude companies like Looker, which is now part of Google. And we try to figure out sort of, um, are there people within your network, starting companies, what are some of the problems you’re facing within the sub-sectors?
And through that, that’s how we source most of our deals today. It’s mainly from practitioners has made me from former entrepreneurs that are now sort of part of that larger
okay, cool. Let, let me, um, I’ll come back to Fika. I’d love to come back to all of what we’re talking about, I went to like a private high school in Southern California, and then I went to Stanford.
You had a totally different path. Um, so start me with Singapore and I I’d love to know. when do you do military service in Singapore?
Yeah, you did right after high school. So when you’re about 17 or 18, you go to the military for back in the day was two and a half years. Now they’ve shortened it to two years. So everyone has to go through it. at that point in time, I think all of us used to dread it. I think we were slowly newly-minted sort of high school graduates and sort of that was prime time in our lives and having to be stuck in a military base for two and a half years.
Wasn’t the most exciting proposition for most of us. But I think that became kind of one of the fundamental foundational experiences in my life. I think it taught me discipline. I, my, my wife complains that I still wake up at five 30 every morning because of my time in the military. And it was interesting for me because right after the military, I came to the U S for college.
And I think we’re most of my peers or my college roommates were just very fearful of leaving their homes for the first time. I, I did that for the last two and a half years before coming to college. So it wasn’t that scary and experience for me. And I think it allowed me to mature a lot during those two and a half years in the military where I had a slightly different perspective on things.
So I think equipped me very well to deal with the challenges in life. So on hindsight, there was an amazing experience, but going through it, I, I can’t lie. It was fairly painful at that point in time.
Yeah, I can’t imagine, like, I don’t want my kids to grow up, but I certainly don’t want them to, you know, go away after high school and go, well, I was going to say, go serve in the military, but there’s something valuable about service that, that maybe we could learn. Um, wait, let me ask a question, which is, when you say you learned about discipline, does that mean, you know, personal discipline or is that also like, just following the rules and listening to authority?
Yeah, I think it’s more about personal discipline. Like I think there were rules that we had to abide by, but at the same time, there was this almost this daily routine that you would need to follow or things you need to accomplish by the end of the day. So I think it sets some formal rigor in my life.
We’re not as sort of, Hey, this is the daily task list. I shouldn’t procrastinate. These are the things I have to get done because they have real consequences in life. So I think that personal discipline that instilled in me through my time in the military has served me well.
Hm. so before I get to college, anything else just reflecting on being from Singapore lessons that, that the us could learn from Singapore, Singapore could learn from the U S.
Yeah, I think now that I’ve been here about half my life, so it’s pretty interesting. I spent half my life in Singapore and half my life in the USA. I think this year marks the, uh, The halfway Mark, it’s exactly 50 50 at this point in time. Um, I think Singapore had a very strong focus on a STEM education, which gave me a very strong math and science background.
So whether it was through college or when I was running my first startup, I think it trained me to have a very analytical approach when I was dealing with problems. So that served me very well. So I’m very thankful that that was kind of the foundation I had. Um, I think if we, if, if you know the background on Singapore, it’s an Island state, where the only resource we have human capital till this day.
So I think in order to succeed as a country, that’s been a strong focus on sort of maximizing the potential of every individual. So I think we were kind of maybe brainwashed is too strong, a word, but highly encouraged to pursue a professional career. So that’s being adopted a lawyer and accountant. So entrepreneurship was never really encouraged back then, Singapore.
so as a result, most of my peers, who I went to high school with have taken on traditional jobs, they’re doing very well in their respective careers, but none of them actually thought of becoming an entrepreneur. So I feel that one thing Singapore could really learn from the U S is to promote entrepreneurship or at least encourage it at certain levels.
I think that’s changing pretty quickly, but I think we’re still a couple of decades behind. So that’s something hopefully that we’ll be able to bridge the gap.
That’s interesting. And that’s sort of a willingness to fail in a sense. I mean, entrepreneurship has this willingness to take a big risk and fail.
Yeah, that’s right. Many, I think, I think that’s a great way to summarize it. I don’t think failure was quite an option when we were going through high school. I think it was it wasn’t seen as once you fail, you have a second chance it’s more seen as at once you fail your life will go down a very different path and we B you can’t really correct your course.
So, I think based on that, I think everyone’s pretty fearful to take risk in life, uh, which I felt that was very liberating for me coming to the U S where it was encouraged. Uh, I had a good support network. There are people who have gone through similar experiences, and I feel very happy that I’ve had both experiences in my life.
Hm. well, and I guess that kind of takes us to, to college for you and you, your own startup.
Yeah, it was like winning the lottery and losing it within, uh, six months.
Oh my goodness.
I came from a, a middle class family. So, uh, coming to the U S was a, was a very expensive consideration for my family. And, uh, I was very fortunate that I got a full scholarship from AIG, the insurance company to come here of college.
So it was a full ride. So I was extremely fortunate was so looking forward to my time in the U S I, I think what happened, my, what happened my freshman year ended up being one of I, it was a sad story that had a great ending, but it was one of, again, another formative experience in my life. so six months into my freshman year, I learned that my dad had terminal cancer and had less than six months to live.
So it was a Swift decline as expected, but, uh, what compounded matters was that we were left with a huge medical bill. I think maybe to go off on a tangent life, insurance is treated very differently in Singapore, where not everyone has life insurance. and my mom wasn’t in the right frame of mind to continue supporting the family.
So I was forced to take a leave of absence from college and find the quickest way to make money. at that point, the business idea that came to mind, uh, was that
so you had to essentially support the family.
yes. Right. Well, the age of 20, I was forced to support the family, uh, not by choice. So, uh, today I joked that I was the accidental entrepreneur back in the day, but it was more circumstantial than anything else.
Wow. Wow. Okay. So, so you have to support the family. So you take a leave of absence to start the company, or did you have the idea for what you were going to do?
I didn’t, uh, we were rushing define an idea. So I was fortunate that I had a college roommate of mine who always wanted to be an entrepreneur. So it’s kind of the meeting of two worlds where this was his life dream. And for me, this was survival, but I think collectively, we ended up sort of figuring out that, um, building an online marketplace where we are selling college textbooks, uh, could be pretty interesting.
I think that came from my time in Singapore through high school, where textbooks were very, very cheap and what happened every semester that we would actually hand out textbooks down to the next class and they’ll continue using the same textbooks while we found here in the U S that people would come to textbooks once they hit head home for the summer.
So, uh, we thought that, um, sort of with those tailwinds And some of the. Pricing arbitrage. We could potentially start a platform to sell textbooks to college students in the U S and at that point in time, uh, I’m sure when both of us went to college, uh, we were buying textbooks from the textbook bookstore, Amazon wasn’t that popular.
We didn’t have platforms like eBay, so it’s a very different time in the market when we built the company.
And so was it a marketplace that you built? How did you, uh, get it going?
Yeah. So we, first we tried the traditional route. So through professors, through friends of friends who actually went out to pitch 70 angel investors to fund me for the company, I think now it’s pretty obvious. I was 20 years old and have the right credentials. So no one actually wrote me a check. So we got stuck.
We needed some money to get the company off the ground. Uh, but what we quickly realized was that E-bay and Amazon paid sellers on a two week cycles. So we bet 10 of our best friends to use their credit cards, to buy textbooks from us. We got paid after two weeks from Amazon and eBay, and then issued refunds to our 10 best friends.
So they then rake up any credit card bills. So that provided the working capital for the business. And I think because
So how so Amazon would pay every two weeks and credit cards. You pay every four, whatever, once a month.
Yes. So maybe a real life example we would, uh, so we would sell a thousand dollars worth of textbooks. These were actually our friends buying from us. And then at the end of two weeks, Amazon with PS, a thousand dollars, which we use as working capital. Then in those, in the third and fourth week, we would scramble to try to sell another thousand dollars in textbooks, not to our friends, but to everyone else.
And then hopefully the gross revenue that we got were higher than the refunds. And then that provided the capital flow for the company. So we actually did that for the first seven months running the company till we got to scale. And they, after that, we had enough working capital to scale the business, but it was completely bootstrapped from that perspective.
And because we start that with Amazon and eBay as sort of our two primary platforms, then the business continued to exist on eBay and Amazon. So we scaled it over the course of three and a half years to about an 8 million run rate business. When we sold the company.
Wow. When did you, you did go back to school, right?
I did I did. I went, I went back to school. Well, it’s, it was me taking some time off and going back to school. So it was often on for about three years and I was trying to balance both running the company and going back to school. So I tried to take as many classes I could, then I would have a light course load for a semester, then have a heavy course load again.
Um, and did that for three and a half years. And we ended up selling the company in early 2007.
Wow. and who did you sell to
Yeah, this was a, this was a fascinating discussion. Uh, we had one about three PL suppliers approach us, in late 2016. they said, Hey, we see the volume of textbooks we are selling. We actually owed by a small private equity firm out in Connecticut. And We want to
aggregate all of you. to create one consolidated platform where we would get economies of scale.
So they approach us
Can you also explain I don’t know, three PLS, all that. Well, or your, or your business operations. Can you explain where, so the handoffs work and what the three PL did for you?
Yeah, so we rented a couple of warehouses, in Connecticut and the three PL provider would come in and manage all the packing, all the shipping for us, they would handle all the returns. And this was only in the first two years we did it all ourselves. So we got to a scale where during our peak seasons, we were selling about three to 4,000 textbooks a day.
I think, my co-founder and I, we did everything, for the first year and a half. We got to a point where we were working 16, 17 hour, hour, days, and this was an unsustainable. So we called up a couple of local businesses and were fortunate enough to get connected with a three PL provider.
They call them three PL.
providers today. I think back at that time, it was called, they will call it fulfillment providers. So three PL is a pretty new term, uh, that exists today. Uh, but we were lucky to get paired up with, uh, worked with them over a year and a half. Uh, and then they approached us saying, Hey, we are, we’re backed by a capital investors that would like to do a roll up and buy a couple of your type of businesses where we could sort of.
Aggregate everything into a single warehouse or location and sort of improve our margin. So they approached us in late 2016. And, I think at that point, my, my co-founder and I never had more than a thousand dollars in our bank account. So this was, uh, something that was very enticing. I think it would finally give my, my broader family, the freedom they needed back in Singapore to pay off all our bills and sort of, uh, my mom and my brother started to carry on with their lives.
So, um, we, we, it’s funny, I think that kind of alludes to why I’m a VC today, uh, when we were going through those negotiations, uh, my co-founder and I, we did role plays for four weekends and we agreed to a number that we would accept and we did over and over again to make sure that we didn’t slip up during the acquisition conversations.
And then we were brought into a board room. That’s the first time I’ve ever been into a boardroom with, uh, our acquirers as they throw out a number and my co-founder and I said, yes, at the exact same moment, and this was 30% lower than what we agreed to. And that’s, I
Where’s the discipline, TX, the discipline.
I know it, it, I think it was just, uh, I think it’s a very modest number compared to what startups are selling for today, but it was life-changing for both of us.
So. Uh, I, I think there wasn’t strong consideration. I think it took away a lot of the stresses in my postal life. So ended up being a great outcome and has given me some degree of freedom to do what I love today.
Yeah. And it probably led you onto this path. To helping entrepreneurs. So, uh, uh, a great end to that story. and maybe I’ll skip through McKinsey worked at McKinsey. You went to business school,
Yep. Precise then I think I was very fortunate in business school as well. I didn’t think that I wanted to go into venture specifically, but I couldn’t think of act two, a second grade idea to work on. So I tried to think about many ideas through business school. None really took off. I was very fortunate to get connected with, innovation of us, which was started by Eric Schmidt, the former CEO of Google and draw Bowman, who was a fellow business school, um, uh, from Stanford.
So I got to know him during the first two years where innovation and was getting started and he offered me a role to work at innovation endeavors part-time for business school. So, I didn’t realize it at that point in time, but I was fortunate that worked on several companies that have become leaders in their respective companies.
I think during my time there, we worked on sofa. We had a look at Uber, which they ended up investing in. So it was a great formative experience again, for my venture career later on.
both of those companies that you just mentioned have had some negative press cycles. I have had some real, you know, negative have, have struggled. do you have your own perspective when you sort of are reading the headlines, about what’s going on in either company, do you think, you know, it’s fair, unfair.
How do you, how do you view that?
Yeah. So we, I think so far it would be a great example. I, I saw so far almost from day one, uh, the founders, when my business school class, I was joking that, I took a class with the founders, had drinks with them at a happy hour and stayed up all night to work on the investment memo all in the same day. So I.
So you invested in sofa when it was busy, your business school, classmates, like that early.
Yes. Um, so I don’t take credit for the investment by work, done it, uh, because, uh, they were brought in by, uh, the partner dry at that point in time. But I think having that sort of close relationship with them in the early days, I think you see entrepreneurs in your purest form. That’s how I describe it.
I think you see sort of the motivations behind why they want to start the company. So I think everything that I read in the news today, obviously we’ve been detached from the company for the last kind of, I’d say five, six years, but at least during the first year, when we got to know them, they were amazing founders.
We saw the founder market fit. We saw how passionate they were about building the company. And it was just incredible for one of my first few experiences to be a successful company that got to scale pretty quickly.
Yeah, I just, I mean, I obviously had similar drank the Kool-Aid at Google when I was there very early and I, I still find it hard to read the really negative stuff, because I know the people and they’re real people and it’s hard to read the negative stuff. And yet there it is. Um, uh, great. Anything else actually, I’m curious about innovation endeavors.
I don’t know them extremely well. Um, how are they set up today?
Back in the day when I was there, it was mainly, uh, capital that came from Eric Schmidt and his family today. I think it’s set up differently. I don’t know the details, but it seems like they have external capital have grown in size and grow the team and have been very successful the last couple of years.
So I think they transform what could be seen as a family office platform to an institutional investment platform, which is a great accomplishment.
and then, um, and then tell me how the transition went from innovation to Carlin.
Yeah. As you know, um, I, I tend not to take the traditional path, so I think. Post-business school with, the experience I had, most of the opportunities I was initially considering were just joining a traditional venture fund up in San Francisco as a VP of principal. But I ended up getting to know a family office based in Los Angeles, which is the Carlin family that wanted to start a venture platform.
and they liked that I was a former entrepreneur that worked at a family office to an institutional investment platform. And that’s what they really want that to do. So I think there was a huge risk on both sides. I think for me, this was a non-traditional career, but in many ways, Starting a company of my own, again, and for them it was taking the risk with someone I’m Truven, at least from a venture track record standpoint, to stand up a $30 million seed stage investment platform for them.
So, um, I think it was, uh, I joke today. It was a match made in heaven. I think the risk on both sides, I ended up being a very successful journey for all of us.
Yeah. do you think that you thought about it quite differently, setting up a family office fund, then setting up Fika or just a, sort of a more traditional VC fund?
Okay. I think I did know what, I don’t know. I think I was, I was, I wasn’t sure what I did know at that point in time. Um, I think there are a lot of. Administrative challenges of setting up a fund?
which I didn’t appreciate it. I think I was very fortunate that it came from one capital source. Um, the entity, the legal pay paperwork were all ready to go and we could make investments from day one.
So I was very thankful that I could solely focus at least for the first couple of years on investing on supporting portfolio companies. And they had all the admin overheads covered for me. Um, so I think that really allowed me to hone and build my skills when it came to picking and supporting companies.
And I don’t think I could have done that, uh, with Fika from day one. I think I would have just been overwhelmed by the challenges of starting a new fund. So I think that was a very good transition for me to get to Fika.
Yeah. Um, yeah, let’s just underscore that like one source of capitals.
I mean, we all love our LPs that we have, but, um, but that’s a challenge. Um, any other big lessons from your investing at Carlin where you were like, well, when I go to Fika, I’m gonna make sure to, you know, focus this way, you know, set up reserves differently.
Anything else like that?
Yeah, lesson. And this, this came from the CIO early on. I, I think we InVenture sometimes drink our own Kool-Aid and we tend to get carried away with the success of our own companies that we don’t think about sort of. cashing out our positions, um, not to say that we should shortchange ourselves and sell out all of the, for our best companies, but I think they told me the importance of cash preservation, because as an LP in funds, you often don’t see any cash returns still find three or four.
So I think that thought need to approach FICO slightly differently compared to a traditional VC where Fika we have, maybe it’s not a unique policy, but we, we, we give strong consideration to selling out positions. Whenever companies get to a certain scale. we think about selling sort of 25% to a third of our position in our companies, just to ensure that we are recycling capital back to our investors and our investors can continue to support us through multiple funds.
So that, that was a very important lesson that I learned from being part of a family office that we’ve carried on to Fika.
Yeah, that’s really interesting. How do you think about what scale becomes the right scale and I’m sure each company is different in situations are different, but how have you thought about that?
yeah, we we’ve had to change the role in the last six months to be very honest with you. I think that the prior role we had that when we are 10 times the money for any given position, this is across our participation in multiple rounds. That’s the first point in time where we would consider selling part of our position.
Obviously valuations have skyrocketed and sort of the timing between funding rounds have really shortened over the last couple of years. So I think we’re actively thinking through whether that?
10 time hurdle still make sense in this market, but there was the role Eva and I had in place from 2016 to 2020.
So that you would hold on longer now because the timeframes are compressed.
Yeah. Or at least set a higher bar. I think, eh, I think, I think you and I have probably seen portfolio companies raise and valuations. That could be 10 times the last round within sort of 12 to 18 months. And I don’t think that’s a strong enough signal where we should be selling out position. I think the opposite is almost true where there’s a lot more potential for these companies, given how fast they’ve grown in their valuation.
Where does it make sense for us to sell early on? So I think we are trying to get to a good middle ground where we’re still, um, de-risking part of our investment, but not losing all the upside of the company.
And I assume a lot of these rounds are oversubscribed. So I guess it doesn’t hurt the founder in any way. It just sort of, de-risks a bit and returns capital.
Yes, I think it, it used to be frowned upon back in the day, when I first got into venture where this was a, a sign of a lack of confidence from the early investors. But I think the market’s getting more efficient today where they understand that seed investors like us have a certain risk return profile.
And once the company gets a certain scale, this is a meaningful return for us and our underlying investors. So I think one day there are a lot of more secondary opportunities where we’re able to sell up position too. It’s not a negative signal to the broader market. So we feel more comfortable thinking about these transactions today.
Yeah. Also, I’m sorry to stay kind of wonky here, but, also was going to ask how long do you continue reinvesting?
Yeah. Yeah. That’s this is another ongoing debate that we’ve had internally. I think when we first started Fika back in 2016, our first fund was relatively small. And today’s will, uh, it’s a $41 million fund. Our goal was to participate in the series a and maybe in one or two companies participate in the series B that model actually fell apart.
Uh, CVC rounds were larger than we expected. So for our first fund, we didn’t even have enough reserves to participate meaningfully in every CVSA. So we are capped out in the CVSA. I think ideally we would love to participate all the way to the CVB and thereafter. I think it’s a very different risk profile for us.
So I think right now at Fika, the current mandate is we’ll participate all the way to the series BS or if the valuation gets above 500 Viven that we would consider not participating, just because it increases the overall cost position for four investments.
Wow. W we’re we’re far less, uh, heavily weighted on that. We, we, we really, our philosophy is get that, get the ownership in that first check, because, you know, once you get up to a couple of hundred million, it’s, you know, you’re getting such a tiny percent, versus taking another bet.
yeah, that that’s the approach I used to take. And now I try to think about it as dollars put to work. So we, and we feel confident that we can return sort of a healthy, multiple on sort of a larger check into these companies that we would still consider making that investment. the other consideration that we’ve we’ve had is, um, a lot of times at seed, it’s very hard for us to get a clear sense and whether there’s good product market fit or traction with the companies, most of the time it’s at the series a or B level where we get stronger conviction, that this could be a great. standalone company.
So I think after that turn of cards, we feel more confident in terms of writing a bigger check.
great. Well, um, we’re sort of talking about FICO already, so let’s, let’s continue on that. you know, start me with this started Fika and, and setting up that initial. Was it $41 million fund one?
Yes. so when I first came to LA in 2012,
Eva and I,
we quickly became acquainted through sort of common friends that we had. And I think beyond Fika,
we share similar personal stories where we came from pretty humble backgrounds,
I think in our early twenties, neither one of us expected to be a VC.
I think that was the last thing we ever thought. And,
I think there was this notion that if we came together to build a fund I think the number one?
role would be to give back to the community.
to the companies we invest in.
So I think with this shared philosophy, we decided
that our existing platforms were great, but neither were well-suited to absorb the both of us.
So we decided to step aside from Carlin and Susa for Eva
to start Fika back in 2016. I think if I knew how tough it was to start a fund back when we did, I’m not sure whether I would have done it.
Um, I never appreciate that how hard it was to raise money for a first fund. I think, uh, I was very fortunate coming from Carlin as, as we both joke about now that that was a single capital source, which made it very easy. to be honest with you, it took us almost nine months of constant pitchers to LPs to close off as fun.
I think we still keep track of the number of meetings we took. and It’s over 700 meetings that we took
in order to close our first fund and it was going on and on we, we hit a wall with a bunch of nos.
We would still carry on with it still. I think it’s, it’s sort of putting on, uh, just encouraging ourselves to both of us that we should continue doing this. And I think part of it, we were fortunate that we were both entrepreneurs before. So we understood that the journey wouldn’t be easy that really helped us sort of get over the hump.
But, uh, I think certainly looking back, it was a really challenging sort of first fund that we had.
Well, and now that fund’s doing very well. And so, uh, you know, you didn’t quite double, but fun too is a lot, is a lot larger. I have imagined that was an easier, pitch than fund one.
Yeah. I think we got, I think, many things to everyone in the ecosystem, including sort of great core investors like yourself. I think back in 2016 investors weren’t sold that you could build a big enterprise FinTech seed fund here in Los Angeles. This was before we saw great companies like service type, an audit board, honey acorns, name of few.
So a lot of the reason why we are able to raise a larger fund was due to the perception of the market conditions, less so of Alfred performance.
Yeah. How do you, you talked about wanting to give back to the community and, um, how do you think about how do you think that will evolve? Like, I think some about if I’m just giving someone their eighth term sheet, I’m not helping them any, like, how do you think about that will continue to evolve and you’ll continue to serve entrepreneurs.
Yeah, I think coming from San Francisco, Eva and I had a good data point to compare the Southern California market versus San Francisco. I think one of the big things that were missing for us was connectivity among entrepreneurs. I think in San Francisco, you would see, uh, sort of frequent meetups between project managers, sort of, um, engineering leaders at one company would know their peers at another company and they will be very, very well connected to the investor community as well.
So there was never a challenge of getting in front of a certain, invest them get a great company. We saw less of that in Southern California. When we start that interactive entrepreneurs back in 2012, a lot of entrepreneurs, they know who their peers were. They didn’t have really good mentors helping them.
So even before we started Fika Eva, and I thought about how we could support this community. And one of the quick ways we thought we could do it was by setting up a retreat where we would bring three groups of people together. The first group were the brightest entrepreneurs.
here in Los Angeles. Uh, the second group was sort of mentors advisors from around the country when build and scale great companies.
And the third will be investors in Silicon Valley that were very interested in exploring new markets, but then really know how to get. Involve in these communities. So we, our first event was back in 2014. This was even before Fika and kind of part of the reason why Eva and I eventually decided to work together.
Uh, we’ve run the event now for five years, we didn’t do it last year because of COVID or the event has scaled from 50 people to about 500 people today. And, um, we’ve heard a lot of great stories about people forming lasting relationships to the event. Uh, two deals actually getting done between a Silicon Valley investor and a local company.
So, uh, we don’t claim credit for the outcomes from these, from the event. But I think we were glad that we were small capitalists in sort of bringing people together.
Yeah. Yeah. I think some about the relationship between Silicon Valley and LA, um, having moved here reasonably recently, um, I often say it’s like, uh, like San Francisco right now kind of has like a Wednesday morning sort of feel and, and LA has this like Friday afternoon field. It’s still very collaborative and fun.
Um, any other thoughts on the, on the relationship between LA and Silicon Valley?
I think more funds are realizing are seeing the opportunity here in Southern California. So whether it’s setting up satellite offices or having partners frequently fly down to Los Angeles, I think it’s, it’s a huge plus for the ecosystem, but for, for local funds, like the both of us, I think learning how to interact with these funds becomes an interesting problem that we’re trying to solve for.
Yeah. Well, let me ask you about that. How do you think about, I mean, there’s competition, we like to collaboratively, we like to be collaborative in our, in our investments, but, um, a lot of the Bay area funds don’t, I would say, um, they want the whole round, uh, even at the seed level. Um, you know, how do you, how do you view that?
Yeah. I think it. It took a bit of, sort of, it took longer conversations to be honest with our regular co-investors up in, in San Francisco, the Valley, I think initially it was challenging because both of us are sort of, we felt that we were compromising our ownership, um, target when it, when we needed to co-invest with Silicon Valley funds by I think what has happened is that they realized that in order to build a great seed stage company, you need local support and help.
As it relates to onboarding your first few customers, which tend to be local, I guess, in a remote world that has changed a bit or hiring your team, your first two or three product managers, engineers that are local. So I think as they start to venture into new markets, they realize that they need a great local partner.
So we found that 10 of over the last kind of 12 to 18 months, we’ve been able to forge great relationships, um, or rekindle, some of them that we already had with Silicon Valley investors and coexists in the ecosystem. And put both of us could get to a level of ownership that we were comfortable with.
Yeah. What are the other, um, active discussions that your team is having at Vika?
Yeah, we used to be a call us down the fairway investors, where we would know a Fika deal very well. It’s usually a deal that’s, post-product some semblance of revenue. I’ll call it in the seven to 10 million pre money valuation range. And I think with how the market’s moving sort of our rubric of how we, think about investing has been thrown out the window.
Um, we seen companies raise money earlier than we think they should. So a lot of entrepreneurs now approach us where they have like a alpha product or some of them just have a great notion document. And then on the other end of the spectrum, we see repeat entrepreneurs or great people within our network start companies where the opening valuation is in the 30, $40 million range.
So. I, I think we were caught flat footed if I were, to be honest with you for the first two or three months, uh, when we started to see this phenomenon on how we should respond. So I think an active debate where we have a temporary solution for today is that, 70% of our investments will still be down the fairway.
We’ll stick to our knitting, but I think for 30% of them, we will go a bit earlier where either we’ve known the entrepreneur for a while, or we have a strong thesis in a certain sector, whether it’s insurance or cyber security. And on the top end where we have the stretch or valuation, we would relax our ownership targets in certain situations where it was maybe a formal portfolio founder that starting a new company. I think some of the biggest regrets in my venture career, would be not backing people that I work with in the past.
Yeah. We just had one of those. I think it’s, it’s going to be a regret. Um, but you know, a friend, someone, you know, quite well comes to you and is reasoning essentially pre-product at a 40 million valuation. I don’t know. Do you consider that
I think we would consider that. So I think a couple of things we still want to maintain diversity in the portfolio in terms of, from a capital allocation standpoint. So out of our current 77 million fund, we have a strict rule rule where additional check would not exceed $2 million.
And we still need to own at least 5% of the company.
And so by definition, 40 is probably as high as we would go. But I think in certain cases where we’ve known the founder for a long time, what trust that they’ll bring together a phenomenal team to execute on the idea we would consider stretching for these companies. But these would be limited to one to two per fund.
Yeah, it’s really interesting talking to you about your fund because we have these same active discussions. tell me about how you and Eva and the team interact. Um, you told me a little bit about your focus areas, but I’m curious, like if I characterize 10, one 10, I’d say David is the patient one. I’m the impatient one.
Yeah. It’s funny. I think I tend to be the optimist where we look at deals that Eva tends to be the pessimists,
Yeah. I, I think about how great a company could be. Eva thinks about all the potential challenges and what we mesh the two perspectives together. We usually get a very balanced viewpoint on a company which has worked very well for us over the years.
Um, I think we tend to be one of the more deliberate firms when it comes to diligence. I think Eva and I would trade, um, using data as our main diligence source. So we need to do our reference calls. We need to analyze the product. We need to go through the financial model. And I think there’s this tweet that was very enlightening to us, uh, by Josh Koppelman at first round capital, where he said the average time from first email to Tobe is from, from 90 days in 2004 to nine days today for first round capital.
saw it. I said, well, he said it on the stage it upfront.
Yes. Uh, and, and, and we, we went back right after that tweet to analyze the main reasons why we were losing deals. And I guess this is pretty obvious today, but it was speed. So we used to take about two to two and a half weeks to process a deal. But I think because of how the market has moved, we’ve moved to kind of a seven to eight day process today. I think. So what that means for the team is that we need to have an informed perspective on the. Sectors that we cover. I think that has, that’s one of the main reasons why I think as mentioned earlier in our conversation that each one of us has, taken a few sub sectors that we’re going to go deep on.
So for me, it’s kind of DevOps, cybersecurity insurance, um, where we feel that if we go deeper on certain sectors, we can respond faster to deals. And we build out their network with each of these sub sectors to run a proper diligence process. Whether it’s a colleague experts in the space or having connections to help the company, should we want to compete on a term sheet?
So I think that’s been pretty helpful, but I don’t think we can compress it any further. I think seven to eight days is as fast as we could go. I think any shorter than that, we’re going to compromise our diligence process, which we’re not prepared to.
Yeah. And so does that mean you even the team are talking daily about these? Are you going back and forth or is it like you’re kind of staying more, you’re doing the diligence for the deals that are in your area.
Yeah, it’s been interesting. I think all of us. Want to help each other. And we’re pretty collaborative by default as a team. So the cast, all of us would try to work on deals together. Um, I think we changed that approach where it’s a pretty simple three step process now for us. So I think the first meeting is usually taken on by one member of the team.
So it could be, anyone could be a associate, it could be, our principals could be Eva myself. And then, uh, the second meetings with two members on a team. So this is, uh, these are the two members of the team that are covering that specific sub-sector. And then if the two members of team get compelled by the opportunity, we tee it up for 14 meeting.
And that’s when the decision is made. Um, I think something we’re trying to eliminate is also strong voices in the room. So I think in the past we would do a live voting where we’d go around the room and everyone had expressed their viewpoints. But I think what we discovered by the time we got to the last person, I think they would be more compelled to go with the flow.
Then to sort of express. So the independent thoughts on a deal. So what we’ve moved towards is blind voting today. So right after the 14 presentation, um, there’s a quick form. That’s being sent out to everyone. We fill out the form with a scoring across different categories, some of our key concerns. And then if that Gil happens to, uh, pass the bar in terms of scoring that we would, we would bring it to a formal vote.
Yep. Um, I realize I haven’t asked you about some, example investments, so I’d love to just talk through a few that have gone through this process successfully. And maybe you could tell me about a couple of exciting companies.
Yeah. I think we’ll talk about some recent ones we recently invested. This was in October last year in a K-12 assessment platform called formative. Uh, this was started by two UCLA MBA students. Uh, I’ve actually known them for a long time. Uh, back when I was running Carlin ventures, we did office hours.
So I got to know, uh, Kevin and Craig, the two co-founders when your MBA students. So we have a long history of, of sort of working together in a lightweight way, uh, but also pretty controversial investment. And being honest with you. I think a lot of us saw the tailwinds behind the business, but education as a category 12 months ago, Still had their own set of challenges in terms of raising late stage capital.
So we were worried that the company could potentially be extremely successful, but not be able to raise the capital they would need. So, but I think ultimately, uh, we are very thankful that we had this blind or closed voting system where we able to tease out all the concerns that the team had and sort of address them sequentially and get to a point where we had conviction around the company.
Um, I think we feel very fortunate to be investors today. The company has grown tremendously over the last 12 months. I think revenue has increased about six to seven for us over the course of 12 months. So, uh, fuel fuel, we get very excited. And I think the second thing is when we first started as venture investors, I think we, we relied on social signals for validation.
I think we were. Overly concern about which other investors win the deal. I think today, most of our deals are deals where no one else is in the deal where we’re looking at the deal alone and we need to get their own convictions in order to proceed. So I think that’s been a fundamental change, uh, among the five of us.
Yeah. Interesting. any other deals? Can we talk about pipe? Is that.
Yes. Uh, Yeah. we, again, feel very fortunate to be part of that story. Uh, I got to know Harry And Josh where they’re running their first company called skirt. and I think about giving back to the community, we would invite Harriet, Josh to all our events. We tried to help them in different ways at their prior company.
And then when they started tight, we were one of the first phone calls they made. I remember this was again, a controversial investment for us more because we tend to back founders that come from that industry
maybe you could tell us what pipe does. I mean, I, I think more people know it, but I’m not sure.
Sure. So pipe helps companies transform recurring revenue to upfront revenue. So if you’re a SAS company with three to five-year contracts, but could do with more working capital up front pipe will trade those contracts that you have, at a small discount for upfront working capital, which is, a great source of capital for a lot of companies today.
And they ventured beyond traditional SAS revenue to other categories. And uh, we think that this could eventually hopefully become, uh, the NASDAQ for recurring revenue.
And is it different than just sort of a revenue based loan that you might get from a bank
Yeah, one pipe understand the underlying customer that better.
Then the contracts actually go out to, um, they can price better than most banks or financial institutions, and you can get the cash instantaneously. So for some cases underwriting’s less than a day. So if you upload all the right information, HighQ can actually give you the loan the same day.
So that’s been a huge value proposition for a company,
do you think this is like disrupting the later stage SAS venture model? Some, because those companies won’t need to take venture money because they’ll take pipe’s money.
And it’s going to disrupt the late stage ecosystem for companies that are getting close to being cashflow positive. Where there isn’t a huge need for large venture scale dollars to get to the outcome, a set of goal outcome. And I think type will be extremely helpful. And pipes also extremely helpful to avoid further dilution of a company’s thinking about going public, but needs an extra 30 to 50 million to just get through the process.
Pipe will be very helpful and I think tight will also be very disruptive to the traditional venture debt model. I think venture that platforms will still exist, but they’ll probably have to reinvent their business models in light of pipe.
And that’s because pipe is understanding the customer better and understand those contracts better.
Yeah, it’s, it’s, it’s applying a tailored underwriting approach to each company. Um, I think for Beto was the venture debt model has been a traditional one size fits all where it’s a standard template for most companies. And I think type is shaking it up a bit. So we feel again very excited about the potential.
The company is still early. So you’ve been live for slightly over a year by,
But they’re, I’m already seeing them everywhere.
Yeah. Yeah. And I think what drew us to the company was Harry’s vision. I think even though he didn’t come from the industry, he spent so much time researching this space before starting pipes. So we were just sold by his personal level of convictions, how much work he put in to understand the opportunity.
And he was never going to lose. I think we are confident day one that Terry would do everything it takes to make this a success. So again, feel very fortunate to have been part of the company since the very first round.
I love it. Uh, TX, we’re coming up on time and I have not asked you about your extraordinary badminton career.
I think, I think the biggest blessing of this guys was that I was actually not good enough. So I was a great high school player and they got drafted to play for the junior national team. at some point in my life, I thought I was going to become a professional player. Uh, but what happened? And this was a quick realization that I was more of a benchwarmer when I made it to be a junior national team.
And so I decided at that point that I probably needed to find an alternative career.
other than that mental. Uh, but I, I, I still love the sport. Um, it’s hard for me to play that mint than today. Cause I used to train six days a week, about 12 years of my life. And I think I was frankly burned out at that point in time.
But competitive sports have always been part of me. Um, I hope to find the replacement one of these days, but haven’t quite yet.
Okay, TX, what’s your mental game when it’s matched points or when you’re down? Like what is going on in your head?
Go back to your playbooks.
when, whenever, whenever I feel stressed and even this applies to Fika as well, go back to sort of what you’ve learned. Go back to templates, go back to your playbooks, go back to what is tried and test it.
ah, so you get stressed, you feel stressed and you think I have, I’ve done the training. I have a playbook.
Yes. Like I I’ve, I’ve, I’ve, I’ve served, I I’ve served a thousand times over the last sort of two weeks. I should just play the same shot, hit it to the same spot. And that’s kind of what, what I used to do.
That’s great. I love that. Um, well, Tia, it’s such a treat chatting with you.
Yeah. Thanks Minnie. This, this was very fun and hopefully we get to do it sometime soon again.