is a five-year-old, L.A.-based seed-stage and companies and a sprinkling of healthcare I.T. startups — as long as they don’t involve hardware or .
The firm’s investors think it’s doing a decent job. After raising $41 million for its debut fund, followed by a $77 millionand an opportunity-type fund with $35 million in capital commitments.
That’s a significant endorsement for such a young firm. Still, even with upwards of 10 promising portfolio companies — including Formative, a Santa Monica, Calif.-based platform for K-12 teachers to create assessments that raisedin June; Pipe, a Miami-based startup that lets companies sell their recurring revenue streams on its platform and raised $250 million at a in May; and , an Israeli startup that sells payroll, hiring, onboarding, and compliance service and raised earlier this year — it’s getting more challenging right now to do what they do, say firm cofounders Eva Ho and TX Zhou. “It’s a crazy time,” Ho offers. We candidly conversed with the pair yesterday, edited lightly for the length below.
T.C.: This is now one of the more prominent seed-stage
E.H.: We feel like we have a home-court advantage here, so about 40% of our deals are here, then the rest are in markets like Seattle, New York, Boston, Austin, and Chicago. We recently did a deal in Toronto because they have a friendly A.I. community. But we still believe in needing boots on the ground, so go after geographies to fly to[our founders] when they us.
T.C.: Your new flagship fund is more than twice the size of your
T.Z.: Our check sizes will grow slightly in tandem with the market. I think initial checks will be in the $1 million to $3 million range; with the last fund, we reserved up to $6 million per company, and now we’ll reserve up to $10 million. As you know, seed rounds are now relatively a bit larger.
T.C.: Tell us a little about investing in a market where everybody is a founder and everyone is also an investor.
E.H.:. It feels like we’re running a marathon and trying to be in a sprint. We have to have a long view and make bets with that horizon in mind, but at the same time, the decisions for initial and follow-on rounds have gotten a lot faster.
T.C.: How do you continue to make good decisions when things are moving so fast?
E.H.: The things we’ve been doing include increasing the size of the team and doing more work upfront on an industry so that we have a more prepared mind coming in. But it continues to be a struggle because everything has been compressed.
T.Z.: I think in the past,could get away with being pure generalists, even within sectors. But we’ve been forced over the last 12 months to even more sub-sectors within our verticals. For example, within fintech, we’ve taken a deep dive into and insurance, which helps us come into deals [prepared] given how fast they’re .
T.C.: What is the fastest deal you’ve done?
T.Z.: In the past, deals we were looking at were getting done in two to three weeks; now, the average time is probably a week to a week and a half to make a final decision. I’d say the fastest we’ve moved is in five days, in a situation where we’ve known the entrepreneur for years, so there was strong validation on a personal level. There was also an excellent founder-market fit regarding what they wanted to do.
E.H.: We pull ourselves out of certain rounds that are moving [super fast], and valuation expectation upfront is just crazy. You see a lot of pre-seed bands right now that are pre-product, pre-traction, and pre-revenue that are done at $15 million or $20 million, or $30 million post-money valuations. We’ll undoubtedly flex for the right things, but there is just a lot of foam in the market right now.
T.C.: If the terms are correct, are you funding pre-seed, pre-product, and pre-traction teams?
E.H.: To be very frank, we have moved a little earlier in some cases. In the first fund, we [invested about] 15% in pre-seed startups, which means the very early product, early traction, and sometimes no traction. In fund two, we’ve invested maybe 25% in pre-seed deals because of the outstanding founders who’ve been shown that they’re able to execute and have a vision — they get snapped up quickly, so you have to adapt and evolve amore. That said, almost all the companies we fund have some [minimum viable product] and some initial design partners in place, even if they don’t have any meaningful revenues .
T.C.: What percentage of yourhave gone to repeat founders?
T.Z.: I’d say 15% to 20%. We can’t and don’t limit ourselves to [serial entrepreneurs], but with repeat founders, dealseven faster than before.
T.C.: What’s the most absurdyou’ve seen in this go-go market?
T.Z.: the most absurd thing we’ve heard is funds making decisions after a 30-minute call with the founder.
T.C.: Would you ever pass on a company because you’re not excited about the rest of the
T.Z.: The speed of deals has forced us to quickly hone in on what we care about. In the past, we had the luxury of having this long laundry list of things we wanted to check off, and positively, we’ve been forced to hone in on the three to five things we care about for each deal.
The more significant challenge is that investors who decide in 30 minutes create unrealistic expectations of founders. Sometimes they expect everyone to process information quickly, and I think they’re missing because these funds are not.
T.C.: How do you get founders to slow down and
T.Z.: We give every founder we’ve come close to deciding on a complete list of every founder we’ve backed in the past with their contact information. Initially, we did this to help us win deals, but I think founders quickly get a sense of what it’s like to work with us, too.