Alfred Chuang of Race Capital joins Nick to discuss The Next Generation of Tech & Venture Capital from the Perspective of a Unicorn Founder Turned GP. In this episode, we cover:
- Walk us through your background and path to VC
- What’s the thesis at Race Capital?
- Why did you name your fund Race Capital?
- I want to talk a bit about open source… there seem to be wildly differing takes on this but what is your opinion of for profit tech companies building products on open source architecture and, in some cases, just reskinning open source tech w/ a UI and selling for profit?
- As we evolve to an increasingly cloud-first technology environment, what does it mean as we transition from a hybrid (onprem, cloud) approach to cloud only?
- How does edge computing reconcile with this future cloud-only environment?
- On the data side… Do you think we move to a Unified Data Infrastructure Architecture in the future?
- Transition a bit to talk more about your journey…
- I want to talk a bit about BEA Systems… sounds like an amazing journey and a great outcome. What is your biggest regret looking back (if any)?
- Ultimately, why do you think entrepreneurs choose you over other firms?
- What’s your opinion on valuation and, as things have gotten more competitive, firms bidding price up and founders really optimizing for valuation at the early stages?
- Is Silicon Valley’s exodus real?
- Will these SPAC deals blow up?
Transcribed with AI:
Alfred Chuang joins us today from Sunnyvale California. Alfred is general partner at Race Capital, an early stage venture fund that invests builds in partners with exceptional founders building market transforming companies. Alfred is also founder and chairman of Magnet Systems, a next generation mobile and web platform company. Prior to that, Alfred was co founder and CEO of BEA Systems. And he led the acquisition for 8.6 billion to Oracle. Alfred, welcome to the show. Thank you. Thanks.
Thanks for having me.
Yeah, it’s such a pleasure to have you on I know you’re doing amazing work, you know, at magnet and then work at UC Davis. For the most part, I’d love to talk about the venture side today. But can you give us kind of some highlights on your background and your path to investing?
Oh, sure. I’ve been in this industry forever. And I started my career at Sun Microsystems I was there for almost nine years, did just practically every type of job that you could imagine some was one of those quintessential companies. And they have no problem having young people trying new things. And my last role there was to work on moving all the sons on it on his own platform, which I thought was trivial, but turned out to be a monumental task. And in a process, I embedded some software, which in turn, became what people now call middleware. And after that, we started a company called BDA. With it in the mid 90s. It was, we got, we raised about $50 million private money, which is a lot back back in those days, from Warburg Pincus, actually a single investor, and Uber was able to get $6.7 billion out of the some s return into different five. So it was a, it was a very successful investment, was the reigning champion for a very, very long time, as the highest return. And B EA, was an interesting company, because it’s a company that moved transaction processing, ultimately, from a single, single location mainframe batch process into a fully distributed network based model. And we were, we were the first company that really allow things like when you walk into a, a store for, for buying the phone, you’re able to put a SIM card in, it walks out some cuts is turned on, you know, there’s a beauty in the store to enable that to happen with networks on and off. And then you walk out three minutes that you can see a billing life on the phone itself. So we enable those kinds of things. Like almost all the televisions that are paying the kiosk at the airport that you do to check in. First e commerce customers Amazon, Netflix, so we were in, we always say 70% of the transactions that we see today still run on technology on Oracle. So I was there the whole time was cut down on a light last guy Turn off the light. And eventually it gets old Oracle and then I have always been an investor, I think people like us, we feel responsible, that we have to do help the young generation the company that get into get into the business. So I’ve always been an avid, I say, investors advisors to a bunch of, you know, young early companies. And, and that’s how I kind of ended up upgrading the firm to do this as a business.
So that was part of the motivation, you were advising investing, helping young founders and decided to formalize it and create a sort of an institutional fund,
Nick, that’s mostly because of economics, right? So the problem is, the reason people allow me to invest, and sometimes they give me shares for free, is because they wanted to work with me, right? Then they want to leverage the experience, from building it from scratch out a way to post public activist shareholders, you know, and an acquisition and the whole thing, right? I’ve seen a lot, you know, during my time here, but, you know, the problem is you you don’t own enough, you know, as an angel, right. But you end up spending a lot of time if you want to do right, because you can’t say no to these intrapreneurs and they don’t stop coming just because when they go through the journey after they go public, they keep running a different problems. So and those jobs are very lonely founders have very lonely jobs. So my role is a critical role that too, not to say no to and to spend time with them. So I’m just thinking of, you know, this is something that ultimately if you want to do it, right, you have to own enough the company so you can ship it, and then you can now have other people to help you to make sure that proper amount of assistance is given to the founders, you know, along the whole journey.
So So Alfred, what is the thesis at raise capital?
Yeah, so raise capital, it’s actually we are a early fun. So which we invest in to see and and in sometimes we do formation company which is pre way before see know that kind of like a A initiation site of the company itself
invested in stuff that we know, which primarily a lot of it’s in data infrastructure, transaction processing, collaboration, or service, privacy and security, digital banking, and open source automation. So that’s all is our focus. And this one is our first one, we expect to do 30 to 40 deals.
And why did you name the the firm in the fund race capital?
I have always come to the belief that speak conquers or so sweet, is extraordinary, crucial. And I think, especially in this business, you know, like, how many have you heard from an entrepreneur, they say, Oh, my God, my, you know, venture capitalist point is moving too fast. You only hear them, they move too slow, right? I’ve been on this side of the game for a long time. You always wish that the people to fund you move a lot faster. Obviously, the reasons they move in the pace of days, they move, but they would love to see things move faster. So for a founder, they love to see and work with fast VCs. Right. So love it. Okay.
So you mentioned open source, as well as some of the other areas that you have expertise in, you’ve built expertise over many years, and now you’re investing in those categories? Maybe we’ll start out with open source. You know, there seems to be some wildly different tastes on this. But what is your opinion on the for profit tech companies that are building products? on open source architecture? Yeah, in some cases, just rescanning open source tech, you know, with a UI and selling it for profit. I mean, there’s Amazon, I think is one of the more common examples of doing this. But you know, there’s, there’s many now, we’d love to hear your thoughts, Alfred?
Sure. Well, first of all, I’m not open source, not all open source or equal. So let’s talk about the area that we focus on first, which is in enterprise infrastructure first, okay. So, and this will be trivial, because then open source really make perfect sense in, in our field. So just think governance in the following way. So when you go start a project, especially an infrastructure, which is plumbing, right, so underneath the application, but broadly use inside large parties, so the best way to create a technology is likely as collaborative people to adopt it. And the people who adopt it, or developers themselves, right, in these large companies. So open source, create an opportunity, like it’s an open forum for people to share the ideas, to share the use cases, right, and to test things. So it is almost the perfect place to openly to create an exploit the creation of a new set of technology for embedding insight enterprise application, you know, so that’s crucial. So that, you know, I think that works perfectly Great. Now, once those applications that build on this infrastructure get deployed, is switching to a whole different mode, and you actually sell to a whole different people, right? So while you’re doing open source, you’re catering to the developer that building the application, but we deploy now, you know, clearly catering to the people that are doing DevOps, maybe sometime the chief security officer, for sure, it’s somebody in operations under the CIO. So they have whole different requirements, right? They have service level agreement, security, privacy questions, and operational needs. So those things, you don’t need to open source, right, because that’s really had nothing to do with the developers, that you’re collaborating with that, that working out the functionality they need. So I think it’s totally legitimate, that you can create a commercial company, the serve that needs right and charge for it, because the customers want to pay because that allow you to have a contractual agreement to make sure these things are up and running for mission critical purposes. So I think that’s works perfectly great in harmony now. Now, obviously, this a lot of things comes into consideration like it, especially in these days, right licensing. So this is why you want to get have good advices up front, because you have to be very thoughtful, and what do you license forever, openly that anybody can take it right? Or is a license where specific things are open forever, but other things are not right that like for operations that you really want to protect? So the phenomena we seen in marketplaces, if you open everything, including the operation stuff, that large cloud provider like an Amazon or Google can easily just take it and they offer those services themselves, then there’s no economic interest Left, Right when you have no economic interest left is hot to make these technology proliferate in the marketplace and prosper. So all of that has to come in harmony. So I think we, we have been doing this kind of like loosey goosey as an industry, we need more automation in the whole open source structure. And, and a fourth bonus in terms of how the whole chain events actually work. So that’s one of the very key things that we’re working on, you know, to help our companies to make sure they understand upfront, what do you put where, right, and what you can charge money for? And what you really can’t. So that’s critical to think through upfront.
Is this related to sort of the common clause and SPL? And? Absolutely,
I think the whole situation will be elastic, and the need to switch the licensing, you know, anytime you inflight switching license, contract is nasty stuff, right? So your customer don’t want to scare that your developers don’t want to hear it up. Right. So but you know, it is what it is. So when you start a new company, you never want to get into that situation, you want to think that through upfront what type of license you want to be for what type of code.
Right, right. And then when you have, when you’re in a technology space that has has communities of people that are really passionate, it tends to add another layer of complexity to, you know, monetizing, and even when you’re providing value to your point, right, like, clearly there’s gaps in the market. And there’s a reason why these things that fill gaps and provided
a lot of value. But you’re totally right. By the way, Nick, they are over 15 million active users on GitHub. Wow. So we’re not talking about this, this is, this is a afterthought. This has not become a mainstream thing in the world, that this is the way to build software. So I think for enterprise use, in particular, which is more mission critical is that we rely on it to safeguard our money, life, safety, this stuff have to really be well thought through at this point. I mean, this this is poeltl mainstream big claims, though.
Well, we could do a whole week probably do two podcasts on it. But I do want to cover some other things as well. So you know, related, but as you know, as we evolve into an increasingly cloud first technology environment, what does it mean, as we transition from this hybrid, you know, on prem and cloud approach today, to a cloud only in the future?
Yeah. Well, first of all, my expenses Tell me, we’re going to be in some hybrid, most likely for a very, very long time. Okay. And the reason that’s the case like it’s actually it’s interesting. You have you seen once on my drive by, you know, these housing developments in a suburb and people open up the garage is packed with stuff, right? And you say, how did they get their car? And if you don’t, right, we live in California. So obviously, nobody put parked their car inside the garage. But so what how do you get into this, how we get to the stuff all the way in the back of the garage, where they don’t either, but it in a world mature it runs that way. We pack the stuff in, we never take anything out. We don’t we don’t get rid of anything. Because there’s that fear that there may be an odd chance that we may need that information somewhere. So we end we end up really strange in industry where we’re the most high tech. Right? Most IT organizations are really impressive, right? their server farms and back their file instances are so big and so vast, but yet they have the oldest stuff around that’s been around. mainframe is alive and kicking, you know, and they’re running batch jobs in the middle of the night. Right? Which is why so that people when they go deposit money in the bank, he said, this one you won’t see until tomorrow. He said, Oh, why right? You say push a button is there? No, it is because the backup is going to be one. So call I think will be the same way we’re going to see a continuing trends of transition of a hybrid model, that some things will be slow to transition. But I think the most important thing is evolving. All new stuff will be running on the cloud. That’s the part we have to focus on. No one is going to be building a new applications run on prem. Because that’s just not a question. Right? So it’s just think about how much time you need to get something up and running these day. And application. Especially when enterprise if you using a cloud SaaS application, it’s almost instantly tenuously, right. You don’t have to go get floor space, race law, air conditioning, the racking the router, the server, the all of a sudden is gone, right? And the capital cost is drastically reduced because you’re renting it. So. So I think the thing to focus on this, what would be the evolvement of the continued involvement of the cloud cloud today it’s not democratized, right? You know, 45% of market share goes to Amazon AWS, right. And then the others are taken up by Alibaba, Google and Microsoft and a bunch of little players. So that I can imagine will be the end picture of going into the next decade. So that also has to be democratized. Because pricing obviously will get readjusted right down, obviously, to his specialty was all come in. So not all clouds are good for serving everything. So like, now we’re using zoom to talk. So serving video conferencing is one type of specialty types of, you know, you know, no type of cloud services yet, but running, you know, continuous job learning machine learning will be we need another type of compute computational power, right, a lot of GPU related technology. So I think over time, we’re going to see the democratization of how people will adopt the cloud, price lowering, and a lot more provided with specialties in there that we can pick and choose. And then we can have fallback failover. And all that kind of stuff. Also, we don’t have any of that today, right? We we’ve got the exclusive provider, and we’ve got the whole farm on, which obviously can be the end game.
It’s amazing, because in one sense, it feels like, you know, we’re in we’re in a much more modern and tech first place than we were five years ago. But it looking back five years, you know, I imagine this will feel like the stone age’s, like the proliferation of so many different cloud services and whatnot. I think it’ll be shocking how rudimentary those actually were.
Yeah, well, industry is amazing, right? So if you look back between the last crisis, Western financial crisis, and this current crisis, what got created cloud computing Software as a Service, the touch phone, the app economy, you know, the gig economy, the social network, I mean, like, everything that we need every day, I mean, like, like, what, how do we live? Like, well, doordash? Okay, so, like, how do we, if we can’t buy things on Amazon, what do we do, nothing is gonna show up at our door. So we got so used to these magical innovations, right? So you got to have to expect the next 10 years got to be far more exciting than the last two combined for it, just how innovation works, right? And technology. Because we have now more mature platform to do compound innovation,
I have to remind myself that this device in my hand, you know, the iPhone, this was 2007. That’s right, it’s nuts to think about it is nuts. It really is nuts
to how much had happened old between the two crisis is totally just truly amazing.
Well, it makes sense why there’s a bit of a hoarding or there’s, you know, the pack garage to a certain extent, because you’re building tech stacks on others. And, you know, you got to kind of you kind of force fit some things and Frankenstein some things and I’m sure my college professor and CES would be pulling out his hair at the you know, he was always pounding the table about the elegance of your code repository, and but we live in a more complicated world than, you know, the vacuum, in which we envision it. Alfred, how do you, you know, how does edge computing reconcile with this sort of future move toward more cloud centric,
in edge computing will play a super crucial role for the general public to see how crucial and how mission critical cloud computing is. So what So first of all, so we’re going to be soon seeing obviously, we’re behind in the US as compared to the other countries, you know, 50 megabit per second network, right, five G’s on very every single IoT device, right? So a very good example of that would be the following. So people ask me, so Well, how do you see, um, autonomous copy rolled out in a world where the legacy cars driven by human will be around for a long time, I said, well, the way that you have to see how that happens, actually quite simple. So the way to do this is to make the humans driven cost smarter, right, we can only do so much with a human when only help them with a device. So the most important device in that car will be a collision avoidance system. So imagine if the collision avoidance system today, today’s collision avoidance systems are based on some radars and sensors, you know, and they avert basically, you know, stopping the car, you know, when you get very close to a collision that you’re not aware of, while you’re not, you know, pushing the brakes really hard. But the future One should not be like that the future one should be, ultimately, a application that running in the car that constantly are communicating with a big data cloud application, that looking at things around your surroundings, many miles down the road to know that how do you avert an accident, right and communicating with the other vehicles around To know that there’s dangers around, right. So, those kind of processing, you cannot imagine a time when can be done locally. That means the only place you can crunch that kind of data, right, which is crunching large amount of data to know all the activity activities, you can get data on around you be able to learn from it and do compound learning on that, ultimately coming to a recommendation or even a decision ultimately, and then, and then invoking an atomic transaction to tell the cars collision avoidance system and say, we need to move two lanes over now, because three miles down the road, there’s erratic situations happening, we want to avoid that. And then that if everybody could do that, then now you can work in harmony between the fully automated car, and the non automated car with a very well versed collision avoidance system. And if this stuff is running on the cloud, and you can communicate with it fast enough, and you can feel safe fast enough, then this will happen, which is the closest path to making, you know, autonomous kind of reality. But the same use case apply to other types of transportation, obviously, in financial services in healthcare, right. So like, imagine that ICU patients being treated for COVID, right, so right now, a doctor goes and see the patient, look at the chart, look at the patient’s vital vital signs, and make decisions, right, it’ll be so much better, we have a systems with a system that learn about all the patients that in the same age group, same underlying condition, ethnicity, other various condition treatment, and use that to create compound learning, and create ultimately a recommendation for the doctor, or even directly executing a transaction, maybe to put more therapeutics into the IV. So, you know, that’s something that technology should be able to help in so many aspects of it, so that this will go from edge computing, right? IoT devices, all the way into now be able to communicate a very high speed with, you know, a large, you know, a cloud base, big data and learning and decision making system. So I think that that will be that will be something we definitely will see in this decade is a second.
Yeah, because we need the data collection systems and the sensors, right, we need the, the pipes to get the data in the right form and munge it into the right place, and then you need the processing, and the machine learning to deliver real actionable insights.
Yeah, I think in seven years, by and large, most of the transaction processing is done manually, we fill a bunch of fields and form and we hit the button return, which is in my terminology is commit and you run transaction, right? So we’re gonna, we’re gonna see a demarcation of that, that to a place where most of the transactions are automated through what I just talked about data learning, compound learning, recommendation, decision making and atomic transactions. And, and that’s what computers are for. That’s what software is for, you know, it’s just, it’s just, we have to get there. I love
it. It’s it’s a much, much better sort of approach to be proactive instead of just reactive to everything in your immediate,
you know, right, exactly. Yeah. Alfred,
you know, on the data side, I mean, we’re talking about data you do you think we move to a more unified data infrastructure architecture in the future?
Well, that’s been a penisy of my whole life, right? So we just the migration to relational database, Del Webb, big data, databases, data lake, we struggle to have any kind of standardization. So I think my guess is going to be we probably won’t, won’t get there. But I don’t think we need to, I think the continuous evolvement, because it just, I think the innovation would would, would dwarf what we need to try to comply to some standard. So anytime there’s an incredible innovation that happens because of competitiveness, people will get them adopted. So that will, that will be obviously that will always have a higher priority than trying to get the architecture for the data structure unified. So I so I’m more I’m gonna guess this, this will be continued to be of often process. But there’s no doubt the transition from totally based on structured data, write fields, and then hit return to this very Instructure. But by learning the essence of the data itself, through many aspects of things, and how recommending, even making very distinct decisions, will be will be probably a very, very big change in terms of how we think of architecture for data itself. Right. So you almost have to imagine this will instigate the change of the entire stack over the next decade, or many, many different things to enable this rightful failsafe for backup or recovery, right? All that networking, speed, latency issues, all that will come into play, because of that change. Very, very exciting time. I mean, like, I this whole time I’ve been transaction processing. This is the first time I see like that this kind of change can happen. Amazing, it’s amazing, you know, sidebar question,
did you ever consider joining, you know, one of the large firms that has some of these focus areas instead of just starting your own?
I have been, I’ve invested in a lot of funds, right, because I think fun, some allow me to make friends while actually to stay in touch with good friends, and allow me to see what they’re doing and learn from them. But this is kind of how the way that I think of it. Right. So I know, I was listening to one of your recent podcasts with Scott Cooper, my friend from Andreessen Horowitz, I’ve know, all the respect in the world for Scott and what he does. But think about this. Mark and Ben have built a quintessential venture from right in the right at the beginning of the last financial crisis, right, right in around in 2008. And I think with all adults, they were the biggest instigator of the change that allow all these magical things to happen over the past 12 years that I mentioned, right? What is called computing or social networking, just think of in every sector, they have made unicorns out of them, right. And the propulsion of the technological advancement had a lot to do with the way that they think about how they wanted to make the world work. Right. Um, and I think the math is actually quite simple. Because obviously, in the 2000 a.com, the big trophy was IPO. Right? So you can go public, and the public marketplace will be able to buy the stock, and then they know, and then the price will go up. And then then they turn into the next decade was MMA, and then the last generation of all these unicorns, and then you get secondary market. And now we’re back to the IPO market again, right, as back. So the wolf go full cycle. So I think people underestimated how, how important is a venture firms role in allowing a whole generation of technology to give birth? Right. So you know, I? Yeah, absolutely. Right. I mean, like it will be, it will be like an honor to be able to join many of my friends up on Sand Hill Road, in the film itself. But I think it won’t have that level of impact. Like when you have a crisis like this, which is a perfect time to start a fun, because all incredible innovation generally start in the beginning, or right after the crisis itself. And using a venture firms ability to guide these companies to ultimately to look at what they need to become for the next decade. Now, because the liquidity path is changing, again, back to the IPO and, you know, a public market, capital raising structure, right, that’s kind of what people think of is the is the well, it’s never the end goal. Actually, IPO is the beginning of the journey. But that is now our next goal. So it’s gonna need some new way to train and to assess, and the work of these early stage founders to think that way. Because, you know, think about it, right. So if I peel goes back to the way it was, let’s say in 2000, we won’t be seeing a lot of E round, you know, f round ish round g round type deals, by then they should, they will be on the mighty way to become a public company, they will be building a company to be able to pass all the compliance tests from very early on, right, the whole goal was to be able to take the company public, and stop that journey. So that’s going to need a different type of, I think environment for them to grow up in. So I think for us, there’s no better time to start a venture fund if we want to be one of those new instigator to help assist for that to happen, especially in super early stage.
So you think this, this next generation of tech is gonna have new generation of venture firms around it that sort of become the essence of the future?
I absolutely think so right now. But you look at a Sequoia Capital, for example, the Sequoia Capital has been around for a long time they were able to pivot and evolve, pivot to evolve and continue to stay at a super important position. And I have every bit of confidence that all of my friends Andres and Horace, you know, no, no caveat, I’ll be there too. So they will continue to evolve really well. But you’re going to need some new firms and New Kids on the, you know, on the block to kind of drive that change, especially early stage deals, right for that to happen. But that’s just a given. Right?
Talk to us a bit about ba and sort of your experience taking it public and then, you know, the post public dynamic and how things shifted, you know, once you have quarterlies, and you got an analyst, I mean, I can only imagine the priorities for the business. You want them to be the same, but there are some differences.
Bu was a fun company, I think it was a fun company. Because it really changed the world, when I never thought that it will have such lasting impact. I mean, it’s just, it’s in so many different way, because when you did this, I can live by a day without seeing my own close to going. So that’s it, that’s pretty. That’s really good stuff for for someone who starts a company that that’s almost more important than anything else more important than making the money, one point, then getting a bunch of awards, you know, the like having seen, you make that level impact is crucial.
Back then, obviously, the journey was very simple, you don’t have a choice. At some point, you do go public, right, and hurdle race actually really low. Now, the big difference between pre 2000 and post 2000 was just the hedge funds, the size was smaller, so they could take much smaller position in an IPO and can still follow the stock. So therefore, the hurdle rate is much lower for a company to go public, right. So when the.com bubble get busted, then a lot of them get consolidated, then they became really, really big. So the hurdle right become really hard because they just don’t have the resources to go follow a stock unless they have enough money in it. So for ba our journey was a given that we have to go public as a company. And it was great, because most of the wealth was made up by our shareholders, after the company went public, what were printers were able to get $6.7 billion out of ba not because they sold at IPO because they hung tight. And they saw that the company pivot is twice after that. And bilgin We hung in there the whole time. And then he was able to reap all the benefits out of that, right. So super smart investor that do that kind of thing. Right? And that you hear the story from legacy Korea sometimes, and Ben and mark all the time, but how could they hang into a public company supplements, distributing it to the limited partners, they’re just super smart about these things, really good investment to that. So I think it’d be a use case, we have to do a lot of these things in flight, that means you have to worry about making the numbers every 90 days, right now, it’s a very simple program to make a public company stock goes up, you guy well exceed your guidance, your guide up. If you can do that consistently and continuously, you’re going to have, you know, you’re going to have a well loved stock on Wall Street. That’s just really what it is now, but if you want to make left hand turn the right hand turn, sometimes that will be abrupt change to stock price we did you know we have decided to do a major 90 degree turn pivot in 1998, right, four years after we founded the company into e commerce platform, right? Because I saw what’s happening with the internet. And we’re only reading, obviously, it will be only natural way to think that at some point, we’re going to be writing back on internet transactions. So to do that, that means a major reboot, major retooling and very different sales model. So that was the hardest part. That means all that sales comp plan has to be changed. So then there’s no way to escape a short term disruption in order to make that happen. But we did. So that that part of the journey was just a given it was terrific. It was heart wrenching. it you know, you you it, these earnings calls are very, very tough. But you do it because that’s what it is. Because this is that’s the beginning of the journey. I’ve always said public company when you go public, that’s the beginning. Most people think is the end is the beginning. Right? And obviously be Yes, a company was interesting, because we grew to be very big. So by the time we sold the company, we were doing 1.7 billion in revenue, generating $450 million free cash flow a year, as a billion and a half dollars in the bank still growing 20% was very, very well move, well run company. We’re just about to embark on a fourth pivot basically, into the cloud. And then obviously, what happened to us was major disruption in the economy, financial crisis. And then we have an activist shareholder is be a was a very, very, very first company that Carl Icahn decided to take a big position and no one had faced him before in our in our field. I was the first guy that was first Wow. Yeah. And he announced it on television with my announcement, right. So we without calling me first, and then and then we have Oracle wanting to buy the company so bad. They lost a hostile bid on the company. So those are things where, you know, you just I wish I was more prepared. I really wish I was so but you look back on the journey. You just say well, I had the whole kitchen sink everything you know, so yeah. And I think about this too. He asked me if I have any regrets. Well, My only regret would be I really love it. Working with my employees, I still get well wishes from them, like Chinese New Year, all of our Asian employees send me notes. So the company is still around after 12 years. So those are really good stuff. I mean, like, like, you have always wanted to be a good CEO, and people like you, but you don’t know until much later, right? That they have a chance to go work with a bunch of other CEOs, other companies, other experiences in life. They said, He’s not so bad, right?
Yeah, um, so so but but outcomes back then were like the wreck homes, I used to go to these CEO meetings where Adobe, you know, a gentleman from Nvidia, those are the classic company, we’re, we’re in about the same size. Look at them, look at how successful they become. So we can only imagine in an odd day, what ba would be like to this day of is around, because then they find a company, you’re probably doing some very important things. Yeah. And very big. So, so but but, you know, when I tell people I was one of the founders, how could you have any regretted dessert, it just is really good. And I got to work with some incredible people really top notch, like wonderful, you know, founder, Bill Coleman, who passed away last year. And like, like, you know, I love these people to death that Scott was one of the smartest go to market posts I’ve ever known. It just is so good. It’s just it’s just, it’s a once in a lifetime opportunity.
Have you spoken with Carl Icahn since everything went down? Not in the recent time, I
had talked to him after the acquisition. So, um, you know, I always had a really cordial relationship with Him. And I think because I think I dealt with him directly straight up, you know, without any filter with any, you know, Investor Relations people, lawyers, you know, he and I was really have a very recommended, so the communications, so and because I treated him like a any other shareholders. Right. And this is the way that you’re supposed to do me like, pa wasn’t my company, it was a shareholders company. And I have I made it very, very clear the whole time. So anytime when you go public, you got to get this out in your head, right? This is the longer your startup is your company, you’re working for the shareholders, you’re reporting to them. So they really are the boss. And I think when you think that way, then then that, you know, they they may be different shareholders, right? They may have a different agenda, but they’re still their boss.
Well, you said the IPO was the beginning. Certainly, it’s a new beginning from that frame, right. It’s a different ownership.
We have a lot of new beginnings. Now, again, so this is a very, very exciting time, right? We’ve been waiting for 20 years for this has happened to see this big of a pipeline, a company that can go public, right? It’s the day of reckoning, it just really is terrific. And congratulations to all those companies. Yeah,
I want to talk a bit about the venture ecosystem in the industry and kind of some of the dynamics that are occurring. Now. For instance, you know, it’s become quite competitive in the Bay Area, over 1400 seed funds, I think over two thirds of them are either located or active, you know, in the Bay Area, primarily. What’s your opinion on valuation. And as things have gotten so competitive, you know, firms are bidding up the price on each other, you know, a lot of founders are optimizing for valuation. Now I’m going through a negotiation for a series A right now. And the founders got three term sheets. And he’s thinking about going with the highest. And he, you know, and I’m telling him Don’t get too cute about this, like pick the right partner, but I’d like to hear your take on kind of what’s going on with sort of the competitiveness and valuations? Well, I
think the competition real, right. So if you put yourself in the shoes, that you despite how much they love you, they shop from you, as somebody else decided to give them 30 more 30% more in evaluation is something to think about. I think, unfortunately, I think it’s, it’s, it’s, it’s really not the right way to think about things. The early stage valuation, what does it do? For me, like, I literally had this discussion with some of the founders, they will say, but so on, so firm has given me, you know, $3 million more in evaluation, since I own more than 50% of the company after the dilution, that means, you know, I’m going to get $1.5 million more. And then, if we’re actually because of 1.5 million, that means I’m getting one of those, I say, Stop, you’re not getting anything, okay? You’re not getting anything until we get the liquidity, okay. So, so it’s unfortunate, I think sometimes it’s stuff get Miss informed that it gets into people’s head, and I totally understand why it does, right. But, um, this is why when you create a company, you really especially in the very beginning, you have to give very good advice, a very good partner so you can think of the whole journey correctly, because I never funded the company that don’t require left or right turn, or some dramatic change in early stage, the audit on do is is a given in the tech business, because what do you have a go to market? This gentleman, all you need a major technological change, it just is what we do. It’s okay, right. But that means that journey is not going to be a straight path is going to go through a lot of bumps. So if you’re optimizing for some super early super short term advantage, likely you’re going to lose out in the long term. That’s just not smart things to do. Right. So like, like, if I tell people I regret that I didn’t get more other, you know, you know, my shares or ba people laugh at me. Right? So that that just wouldn’t make any sense, right? Yeah. Right. And I’ll go back to Bill Janeway. I said, You know what, I should have done more that this is crazy talk, right? It’s dumb. So So if that’s the case, that means you don’t want to fall, you know, you really, really, really want to focus on what you want to accomplish, and find a really the right people. Now, this is the way that we think about partnering with founders. And I think this mutual, and the way we can go was very simple. People asked me so well, how do you determine this is a company you want to invest in, in early stage, I say if this company I want to co founded with, that I will, in any moment jump on my own two feet in the building, the company would have found this, I don’t do it. Wow. Right. That’s where the conviction come from. Right? This is the ultimate gut test, you don’t pass that gut test, you don’t do it. So I urge the founders on either side to say, Well, think of me as your co founder. If you don’t think of me as a co founder, don’t do the deal with me, Don’t torture me, even though I love tortures. But I can’t, I can’t get tortured by that kind of mindset. So once you can resolve that the valuation problem become far less of an issue. Because first at least you can openly talk about choose, and you judging why you pick this partnership. For what reason, right? This would be like you’re picking, you know, I’m signing a company, I’m going to find free co founders who started, you can go nickel and dime them on the equity, right? Because then you just got off on the wrong foot, and no one’s gonna be happy going forward. So why should we do that with the venture capitalists, your first backer of the of the deal. So if you don’t want to be you don’t want to think of them as co founder, don’t do it. Right. So I know this has happened, because we have so many, you know, there was such vast amount of funds, though. And there’s all these party arounds and people blindly sending a term sheet that they haven’t met the company, I heard all this stuff. Okay. But but we’ll have to think practically, what are you trying to do? Are you really building a company? Would you want to change the world? Do you want to have that kind of impact? Do you want to wake up one day and say, Well, you know, what, I just hit a button at a bank somewhere, and it’s gone from my cold. You know, I can describe enough time how gratifying that is right to this day. And sometimes I get scared, you know, when they have a bug and the things, you know, like, stop, I said, Who is it my code? Right? So, you know, it’s, it’s just this is, this is crucial stuff for people to think through. I really do write, and since you have you’re so far away from liquidity, why optimize for the short term? That’s really a dumb thing to do smart people that that build remarkable company don’t do dumb things. Well,
I love it. I love the co founder test, we we’ve got sort of an altered version of that, and our final icy pitch template, it’s if you weren’t working for new stack, then tomorrow, you would go and work for this founder, you know, no question. And if people can’t answer that in the affirmative, then we don’t do the investment.
Like I didn’t mess with you how we actually run the fund. So the way that we run the fund, so now obviously, I’m handicapped because I’m, I’m really, I love running software companies and building them. So we run the fund, like a software company. So every year right in the beginning of the year, we go to an off site, we map out the vision for the next 10 years and refined it every single year. And we have basically all the key product plans that are needed to make that vision happen. So like the things that we were talking, we’ve been talking about on this whole what I call predictive transaction, which is using big data to drive automated decisive decisions. If we want to make that happen, what kind of companies we have to have infrastructure, and we recently funded the company that allow you to go to analysis and do learning on basically very private data like patient’s data and banks, PCI data, because those are all the hurdle you have to you must be able to get through. So we start with a vision we look at we map out which are the type of company we have to go find purposely so that this vision can become a reality. Right? We track them down. And the way that we run the fund is very interesting. So with Dvf, two different roles among the GPS, who do different things, but worked wholly as a team coherently like running a software company, every day, at 4pm, we don’t do money meetings every day or 4pm, we have a scramble. If it takes only half an hour, we’ll do half an hour. If it only we’ll do an hour. Sometimes it takes two hours, right? And if we need to bring a lawyer on, we’ll bring a lawyer on would get through all the timesheets problem right there, right, every day is a grind. Right? So but yeah, Ben used to have been howitzers of their course outfit. You’re the guy that loved the torture. Okay. So I really do I love the torture, I love this drill. Right? So and that I think resonates a lot with the founders to know we’re working in the same fashion. So when I say I’m going to get on it, I’m really going to get on it. When I say I’m going to help them to find a pm. I’m going to jump into helping them to find a pm. Go for my time that will reach out to people and talk to them right away. Yeah,
well, a very smart LP load, Tony told me one point that the best GPS that he’s ever encountered, run their firms like startup and not like check writers.
scrappiness is critical, right? Because I’ll we want our founders to be scrappy, so we must be scrappy also.
Love it. Alfred is is this exodus from Silicon Valley, we hear people fleeing to Austin in Miami and all the rest, like Is this real?
I’m gonna guess the following. I’m gonna guess that I’m not leaving. So number one. Okay, so, so not real for me, I’m going to guess that is real, but temporary. And I think this is the following situation that we’re dealing with, with all adult, the growth of Silicon Valley, especially in San Francisco in a city has been fast and loose. And the quality of living has been challenging, I think I won’t be the first one to bring up the homeless issue. The density issue, the cost of living issue, the rent issue, we really are faced with a lot of diversity of a lot of people are proudly into into a small space very quickly. And this is this whole style of getting onto a bus and you get stuck in traffic for two hours to get to work in a tiny desk for eight or nine hours, and then you get back on the bus for another few hours, is really unbearable. So you can blame the people that went now that we’ve gone, everybody, everybody become decentralized and remote. They just don’t go, you know, to a cheaper, better place, right?
in California, so if you just move outside of the 6080 miles radius of San Francisco City, you’re living a whole different lifestyle, you’re living in really the California lifestyle. So you can’t blame the people for doing some of that. Now, I think there’s obviously a major issue, which is, our tax rate is really high here. Right? And that you witness, there’s a lot of liquidity events is happening as we have IPOs and specs and other excesses happening. You know, look for someone that like sitting in this room and say, if I just drive four and a half a mile to the Nevada side of Tahoe, I don’t have to pay state capital gains tax, right. And I’m going to be in a same room anyway. So this crossed people’s mind and they start doing it. So one person’s I do have more people trying to do it, and more and more time to do it. So. So this is really a price for value issue, right. So that’s really something for our state for Gavin and his team to really digest and think about what we can do. Now, obviously, we will return back to some normalcy. Now I can see us going back to the way we work, especially in tech anymore, that’s just the two hours bus ride. Eight hours in the office and a tiny desk, it just I can’t see that returning back to the way it was. But office still have a place socialization, and having people in a room to brainstorm to agree on things still going to be needed, that’s still going to be happening. So I will believe that once things get normalize, we will see people some of the people will be returning some maybe lose for a loss for a long time. Right now. There are other issues that are in the background, which is California has a law that you know, I think it’s at the end of this year in 21. If you have a board more than seven people free of them as a woman, it’s great. It’s terrific. But some of the companies looking at them, someone said, Well, I just can’t get there, okay, because I just don’t have enough time. So then they pick up the company and they move the headquarter of the company. So those are kind of almost silly to do that. So those are all the things that I think it’s time for, you know, people in Sacramento to really to rethink what really is happening in the world and the tech industry. Is that crucial to California? What are the things that we should be thinking out of the box? Why other people winning? Why we’re losing? And then we have to, we have to be scrappy, like everybody else in the state. But well, to see Silicon Valley goes away in this place of importance, and highly. I don’t I don’t see that.
Very good transitioning a bit. You mentioned spax, a couple times, you know, what do you think of this backs? Are these things going to blow up eventually? And if they do, what happens to tech and venture?
Yeah. Well, obviously, going IPO has changed radically in the last 20 years, right. So the compliance requirements are very significant. So and, again, you know, the issue of the hedge fund has become very large, and the position they have to take has to be super large also, because they just don’t have the kind of resources to go try to stock or sell on major issues. So not all companies will have the opportunity to to go get capital from the public marketplace. But the reason why we have a vibrant IPO market at this point in the spec market, is because the investors in the public marketplace wonder, right? It comes from the demand. Right? So the that leads to really good news. Now we have we have literally public market investors want to invest in a tech that that much specs inherently right, it’s time limited. So they generally have 18 to 24 months kind of timeframe. So what I will always tell people, and everybody will call me the never without a deal comments at what do I think of this one is going to spec? And I’ll say well read all of the case, and the disclosure very carefully, right. And because they don’t have the same requirements as an IPO process, you really have to look at the underlying performance of the company and their predictions, especially what they’re already forecasting, what are they forecasting in the next 610, you know, 12 quarters, those are very critical things to really focus on, when you what you know, when you when you’re investing in these in these stocks. Now, the thing that I worry about is, let’s say the spec has gone on for a long period of time without really a company to drop into, and they at the very tail end of the life of spectracell. And awesome does a company go in there, I look at those even more carefully, right? Because you just want don’t want somebody to do things because of the desperation. Now, overall, I believe spec is a very positive thing. Because it allows the public market to have access to high potential company, they normally won’t have access to the free market should have this level of support for these type of vehicles. But those investment needs to be savvy enough to understand the risks that they are they taking on, they are different from the traditional company that gone through an IPO process and the scrubbing that goes through, right so and forecasting their wealth to do so they’re not quite the same. So that’s the only caution that we really have put into, but I will say if we can sustain this, and the companies that by and large, right, so not everyone’s going to work out. They these companies are good in the spec that I’ve been we’ll have a vibrant market to make up of that structure that we very much enjoy until it boosted you know, in the 1999 and 2000 timeframe. Right and a very vibrant exit market. For tech. That would be great.
Alfred, what do you know, you need to get better at? Um,
I think I’m
starting a fund is a whole new learning exercise. Because your reporting structure change you have your bosses are different, right? So now, I’m not investing just my money. I’m investing LPs money. And there’s no perfect way of how firms interact with LPs. I will say some of the best answer that I heard on your own show would be like Scott Cooper has some superb answers about you know, why staying in touch with LPs because, you know, it’s not for a one time investment. You know, your best LPs are the ones that hang with you for your all your subsequent funds, right? So they become supporter and you do things collaboratively with them. And they really do a superb job, you know, they LP meetings, like world class, right in an unheard of grade. And and this is somewhat like a conference, it’s just it’s just like, like everybody’s when you get to scale you really have to do like the way they do it. I mean, I don’t have one single LPs that go to the LP meeting and don’t say great things. So, so managing LP is a very critical part especially, you know, thinking about like, we are small fund. We are investing we have so far we invest where we invest in some really resounding deal that they these companies are going into racing this next round of funding much faster than we think they would because they just may have made that kind of progress and they read this Scale to the next level. And I’m making all the Perata investment will be challenging for fun, you know, that’s quite small, right? Because our job is to invest in a new deals, not just to keep investing in the future wherever they invested in, because that’s what they pay us money for. So we have to share this opportunity with LPs. So that means you have to be in constant contact with them to understand their interest. Right, like an SVP format of the product. And you have to understand, you know, who’s really have big appetite? Who has smaller appetite, who you need to cater to, because that’s a very critical part of building a relationship. I mean, I will say every LP these day will tell you, they love to get access to the direct deals, right? They all would love to. Yeah, that’s a very common theme that you hear. Yeah. So and, and when you recruit them, it’s easy to promise them everything, but you have to deliver. So the delivered that you have to manage that process really well, that means you have to be in very, very close contact with them. Right? You know, on IP, and our own LPs ranges from the sovereign fund into family offices and a variety of different individuals, right, so we have to cater to all of them. So that’s a very crucial part, you know, you really hear that much about LP management in our world, right. And it’s hard to learn that either, right, because nobody’s really talking about it. So and you don’t see any right up in anything, people don’t share that kind of stuff. So to me, I’m a lot to learn, right, and, and this and that. And suddenly, I’m no expert, I’m amateur in this department. But it’s also great and right time for a reinvention of how what that relationship should be. And I think it is definitely evolving. Because, you know, your LP can become the investor, the sole investor of the next round of your own company. But that’s really is what’s happening in our world, right? They have that kind of formidable resources to do that. And they want to be, right. So I think awards mixing, especially in late stage, do a lot of individuals are putting up very big money, sometimes they lead very large deals, right, and become very major shareholders people that the company exit. So those LPs, you have to, you know, understand, collaborate, accommodate, and work with them very early, so that they can become your supporter, you know, in your future rounds of funding. So which is which is critical for, you know, altana business, right, so you don’t do this one time.
Such a good lesson. We don’t talk about that much. But you know, at New sec, we’ve got about 50 LPs, and it’s you got to be super intentional, it can be a job in and of itself to get it right to get it right. And then Alfred, what’s the what’s the best way for listeners to connect with you and follow along with raise capital M.
I’m an email junkie, at the top level. So Alfred at raised capital is the easiest way to reach me. And lately, I have gotten a lot better. Um, since my since the date, I promise retirement will be better. I am getting better in my LinkedIn management and answering to all the messages on LinkedIn than I used to be. So a lot of people do connect with me on LinkedIn also, and, and I have a very vast LinkedIn connection database. So I always encourage people to reach out to me through that channel also. Yeah. Well, Alfred,
this is such a pleasure. I feel like I got a crash course today and I just can’t wait to do it again. So congrats on the fund and it is an honor to be on your show is really terrific.
Thank you so much.
Thank you, sir. Take care.