TRANSCRIPT

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Sonali  - Hey Arun. Hi how are you?

 

Arun -  I'm good Sonali how are you?

 

Sonali - Thank you so much for taking the time. We are here right now in the Storm Ventures office and it's here in Sand Hill Road right in the heart of Silicon Valley. So I was looking around there are like venture funds all around us right.

 

Arun - That's right.

 

Sonali - So can you name some of the funds that are here.

 

Arun - Yeah of course so there is across in one of the other buildings is Redpoint Ventures. Sequoia actually used to be right across here but they moved out I think a couple of years ago and there's a handful of smaller funds in the area too but in general this is a favorite of new companies coming into. So it's nice to see some blood in the area.

 

Sonali -  But it’s all VC funds over here.

 

Arun - It’s all VC funds yes in this in this complex over here. And actually we moved into this office fairly recently. We moved in about a year ago we were further down on Sand Hill. Okay. So we moved into the space fairly recently.

 

Sonali - It was really quite cool to see it right because when you come in over here each building just has names of different venture funds.

 

Arun - That's right.

 

Sonali - So as an entrepreneur you can just come in and start going to each one.

 

Arun - Yeah yeah. I mean Sand Hill world we're all there's a bit like that. So you know people talk about making the Sand Hill track which essentially you know if you if you're pitching to a lot of VC firms you have to come to this road fairly often.

 

Sonali - And I'm sure that the room that you are like sitting in you have heard many pitches in the past.

 

Arun - Yeah yeah. So we have three conference rooms and you know we have we meet a lot of companies on a daily basis so as a result we often meet a lot of companies in this in this room particularly, yesterday.

 

Sonali - Yeah so like how many pitches do you get every day.

 

Arun - Yeah, so it varies. I would say over the course of a week I probably will meet about 15 to 20 companies.

 

Sonali - That's a lot.

 

Arun - Yeah. So and then you know there are days so Mondays usually we have more sort of Storm focused events so we have our partner meeting and more sort of team presentations for the entire partnerships. So generally and we might get into this later into the in the talk as well. But generally the way it works is when a company comes in they usually meet with one or more people on the team.

 

Sonali - Right.

 

Arun - So for example someone come and meet me and then I would spend some time talking to the founders learning more about the market and really trying to understand if this is a good fit for Storm and whether Storm is a good fit for the company.

 

Sonali - Yeah.

 

Arun - And if I do think that is the case then the company will come out and meet the rest of the team. So, so because to me the rest of the team obviously everybody has to be in the office so we allocate one day for that and that's Monday.

 

Sonali - Oh that's Monday.

 

Arun -  That's Monday.

 

Sonali - Oh you have a day designated for that.

 

Arun - Because that's when we expect all the partners to be in the office.

 

Sonali - Okay.

 

Arun - Because the rest of the times they might be travelling, there might be meetings off site and so forth but Monday we expect usually we expect everybody to be in the office.

 

Sonali - There's probably lots of nervous energy on Monday.

 

Arun - Yeah yeah  partner meetings are usually one of the final steps in the investment process. So it’s exciting as well because you know if generally if things go out of the partner meetings then it usually leads to an investment.

 

Sonali - Yeah.

 

Arun - So is that what as you said there's nervousness as well.

 

Sonali - I mean I was looking at your website like your portfolio and there's been a lot of exists and lot of well known names like Marketo and Mobile i was another one I saw. So I mean you've been with Storm ventures for how long now.

 

Arun - So I've been strong for a little less than two years. The firm itself has been around for about 16 years now.

 

Sonali - Wow. Okay.

 

Arun - So we raised our fifth fund early last year.

 

Sonali - Okay.

 

Arun - So there's a lot of history in the firm.

 

Sonali - Yeah so I definitely want to get into the mechanics of how VC work. So but before we go into more details tell us a little bit about your career path so far.

 

Arun - Sure. Sure. So I was born and raised in India. I came to the United States for undergrad, attended the Carnegie-Mellon and then I went for I got a master's from from Stanford and then I worked for a few years. So I worked in software arch development at Oracle and then I went to Stanford again to get a business degree and then I joined Storm.

 

Sonali - Oh I see.

 

Arun - So my path has been a little both. Venture capitalist firms do hire a lot from the MBA programs so I would say it's not necessarily be nontraditional but it's it was something it wasn't something I was really thinking of doing when I went into business school.

 

Sonali - What were you for thinking then?

 

Arun - Yeah so my goal when I went to business school was more to get into early stage companies and focus more on the product side. So like I said my background has been technical for a number of years and when I was in business school obviously being Stanford being very close to Silicon Valley or I guess being the center of Silicon Valley and a lot of VCs were on campus right and we were very fortunate to meet and learn from them. And so it was very interesting you know just learning about the industry from them and what I decided to do was essentially spend the summer in VC you know just and it was interesting because at that point my thought process was I'll never be able to do this full time so maybe I should spend all summer.

 

Sonali - After, oh okay.

 

Arun -  Yeah spent the summer looking at venture capital so actually interned at Storm.

 

Sonali - So you did. Okay.

 

Arun - Yes. So it was a great experience. We didn't make any investments when I was here but it was it was a fantastic experience you know meeting different entrepreneurs learning more about the investment process, learning to think about companies you know from a from a view point around things like market, team, growth and so forth that which really helped shape what I want to do afterwards. So when it came time to think about full time I really just loved the industry and the role. So I decided to pursue that.

 

Sonali - No definitely so when you summer. So this was in your first year of business school right after first year.

 

Arun - Just after my first year.

 

Sonali - Yeah. So what profile do you join a VC firm at.

 

Arun - Well I joined you mean the title or.

 

Sonali - Yeah.

 

Arun - Yeah summer associate.

 

Sonali - So as a summer associate. And so you actually can you talk about the levels or the hierarchy in a VC firm.

 

Arun - Yeah so so summer internships are usually pretty rare in VC. So some VC firms do obviously try to tend to hire over the summer. The reason is it's hard to get a lot done over the summer because you can I mean if you're a very large fund and you have a fairly regular flow of deals coming through the pipeline then it's good because you'll start off through the entire process of you know finding a deal working on it and then obviously closing and helping the company later on. But otherwise you know in three months there's only so much you can do. So so that's a bit rare and we can talk more about my summer.

 

Sonali - But I want to know how did you how did you make it happen for you then like what was special about you that you managed to get.

 

Arun - So there's definitely nothing special about me, to be honest I got a little bit lucky in the sense that what I had done was essentially reached out reach out to a lot of alumni in the network and essentially asked them you know what is the best way that I can spend some time at your firms. And they were very generous you know with their time and you know they had some recommendations on strategies I should use to reach out to VC firms. So essentially you know spoke to a number of people in the space and one of the things I did present was sort of more thinking about what I can contribute in terms of market research of different companies so.

 

Sonali - So you sort of made that clear when you were applying.

 

Arun - Yeah.

 

Sonali - Yeah. Okay. Because we do want to touch a little bit about strategies.

 

Arun - And I'm going to talk more about that because I think that's a longer discussion.

 

Sonali - Yeah.

 

Arun - And so I was fortunate to kind of you know meet some of the people of Storm and work here.

 

Sonali - Yeah I mean I hear a lot about that how VC firms you can either join after having spent some time as an operator which you did in your case because you were in Oracle for a while. Like when you were at GSB did you ever consider starting your own company.

 

Arun - I did. Yeah so I did actually spend a fair bit of time talking to my classmates over starting companies and you know we did prototype a few ideas and and and have some discussions. At the end of the day for me there wasn't an idea that I was very passionate about that I was willing to you know essentially put everything else aside and pursue. And at the same time you know just in working with investors and we could talk a bit about my background as well because that was your initial question that led into this. So I've been investing a little bit through my family in India.

 

Sonali - Oh I see.

 

Arun - So there's some bit of background there but I've always been fascinated with the investing side. So I decided if there wasn't an idea that I was extremely passionate about then it doesn't make sense to you know really go be an entrepreneur until at least I find that idea. And I saw VC as another way of where I can meet great people you know learn a bit more about portions of the industry that I wasn't experienced with so obviously I had worked in enterprise technology. But there's so many other aspects of you know building a company that I had no idea about. So this was another way to like spend time and kind of get to learn that.

 

Sonali - Yeah and you're getting 20 pitches every week now. Right.

 

Arun - Right right exactly. So you get to know what's going on.

 

Sonali - So tell us like how would you how would you describe venture capital and how would you describe the job of a venture capital.

 

Arun - So venture capital at a very basic level is investing in sort of new and growing companies right. And the idea behind venture is there is some amount of risk in investing in these companies so they generally typically tend to be pretty early. So Storm specifically invests in very early companies. So I would say series A primarily but we do some seed as well.

 

Sonali - Alright. Can you talk about that a little bit.

 

Arun - Sure. Sure. So seed and series A  primarily refer to the stage of funding. Again you can argue based when Angel Angel investing comes in but seed is usually the typically the first check into companies. You can argue you can you can debate whether that's friends friends and family or more institution around. But seed is typically the first check into a company then you have series A series B series C which is all on rounds and if things are going well usually the amount you're raising goes up and also the valuation of the company goes up.

 

Sonali - And is the difference primarily the amount of money that you're raising or is it the stage. I mean of course the stage is increasing.

 

Arun - So you can define stages in different ways one is you know the amount of revenue generating every year right. The other one is let's say the number of customers you have or the size of the team. But typically when you talk about growth you talk about the amount of revenue generally and obviously they're tied to customers and things like that.

 

Sonali - Oh it's a very good point so let's take that. So let's take so you guys invest in enterprise SaaS a lot.

 

Arun - Yeah.

 

Sonali - So how you don't have to share exact figures but generally what revenue would constitute early stage as opposed to series A,B,C.

 

Arun - So unfortunately like most things it varies. Again it depends on the industry. So if I had to pick a number let's say one to two million in revenue would be a good would be a good benchmark.

 

Sonali - For series A.

 

Arun - For series A.

 

Sonali - Yeah.

 

Arun - But it varies I mean we've had companies way below that raise what typically BCBA s rounds and at valuations. So the way this categorizing in a series ABC can also be based on valuations right.

 

Sonali - That's right.

 

Arun - So let's say 10 to 15 million valuation can be a more traditional series A but depending on how good the market is you know if it's a it's a very aggressive and hot market you in a seed a seed round can have a very high valuation.

 

Sonali - And it's probably true more so in consumer companies right where you don't have any revenue.

 

Arun - Yeah. Yeah they do substitute revenue for user growth.

 

Sonali - Yeah. Okay.

 

Arun - And more people using your product. And that would be a proxy that they would use. And when we look at companies again these are rough benchmarks and it will vary by industry. It'll vary by the founders and we can talk more about what we look for in companies.

 

Sonali - What everyone wants to know right.

 

Arun - Yeah yeah. But what determines valuation. Some of the things that determine valuation we like as it revenue and also the growth rate of the company. So even if you are if you if your revenue is very high but your growth rate is very low you will not typically get a large valuation.

 

Sonali - Got it. I mean what kind of growth rates do you look for.

 

Arun - Again its across the board based on type of companies but you know it can be as little as you know 30 to 40 percent every year depending on how large the company is too. You know we've obviously seen companies double and triple or quadruple over here.

 

Sonali - Yeah yeah yeah. I think that's one key thing about venture capital at least in Silicon Valley that you are looking for a certain exit.

 

Arun - Yeah.

 

Sonali - Like unless and until you see that exit you wouldn't even invest.

 

Arun - Yeah. So again that that is typically correct because at the end of the day you know as investors we do want the capital come back and obviously we want to make a multiple on that. So one of the thing is it's always difficult to predict and exit is that especially if you invest in an early stage you know the returns can be six seven eight years down the line. Obviously you can get acquired much before that. So I think you should think about. You should think about you know whether there are natural acquirers to the company you are investing in but again if you expect the return exit to these many many years down the line it's just it's not something you focus very heavily on.

 

Sonali - Got it.

 

Arun - Generally what we find is if you are focused on a large enough market with good teams even without, the exits will come in.

 

Sonali - One way or the other yeah.

 

Arun - Eventually comes.

 

Sonali - Yeah okay. So the next follow up that I think would make sense here is to understanding what is the typical process then if you can walk us through how and eventually a how a deal finally happens.

 

Arun - Yeah. So when we meet a company the first thing we think about is is the company in a market that we want to invest in. Right. So for example we talked about enterprise SaaS. So very basic example would be that a consumer company would meet us we wouldn't invest. Right. So the first thing we want to think about is is sort of the market and the strategy good fit for us. The second is is the stage of the company. So let's say a company has already raised like 30 million dollars or something then it's too late for us. We wouldn't invest.

 

Sonali - So you are only up to series A.

 

Arun - Yeah. And we do some you know we do a little bit of later stage as well. But for example we wouldn't do like a series C or series D round.

 

Sonali - Right. And that's just a like strategic decision.

 

Arun - Yeah. So it's a it's it's a result of a number of things. You know our fund size is 180 million. So typically we want to have a certain amount of ownership in a company. So you know it can vary but let's say 10 or 20 percent. So if the valuation is very high then we have to put a large amount of money in to really get that ownership  and you know it doesn't make sense to put that much amount of money out of a 180 million dollar fund into one company essentially. So that's typically the reason we don't want to go too late. The second thing is we also work pretty closely with our companies not just in terms of financing but also in terms of helping them go to market. But by that what I mean how do you really think about who should you sell to what is the best way to sell to them who are the people you need to hire. We make connections to sort of customers and partners and all that.

 

Sonali - So you try and see for the fit in the team and aspects.

 

Arun -  Exactly and all of that is again we can be most helpful to the companies earlier. But as you go later and later it becomes a little bit more financial decision because you know at that stage hopefully the company has cleared all that stuff out. So again you know given that we like to be more value added investors is again not a good fit for us.

 

Sonali - I see. Okay so you said the market the stage.

 

Arun - Yeah.

 

Sonali - So that's the initial screen right. So based on that you know we had we do the first meeting you know we really think about the overall market the team is going after you know look at the team you know do they have the right background. In our opinion at least it's always hard to judge based on one meeting. But what is their vision for the company. One thing we always try to think about is you know they're doing something today but really like I said the investment period is horizon is like five six seven ten years. So obviously it's impossible to predict accurately but it's always good to have some idea or at least expectation on where we think the market is.

 

Sonali - So I want to know a little bit more about this which is that so you want a great market of course and you want a great team.

 

Arun - Yeah.

 

Sonali - Let's say you three strangers reached out to you and say hey Arun I am doing this  and then you meet.

 

Arun -Yeah.

 

Sonali - So let's say on paper they have great credentials.

 

Arun - Yup.

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Sonali - And you know when you talk to them seem fine. But is that all it takes. And then you have a vision what are these other after things like.

 

Arun - Yeah. So so so the next thing is really diligence right. So if I do like you know what we see in the first meeting. Right. We spend time for example talking to their customers if they have customers right. Doing personal references talking to our contacts in the industry hey you know someone is working on this idea does it really make sense. We spend more time with them. You know let's say you have this idea what will you do next.  So because the first thing is.

 

Sonali - Like an investigation.

 

Arun - Yeah. It is it is often an investigation because again after this. So one of the other things that I didn't mention before and a lot of VC firms do this is obviously we do follow on rounds. So it's not typically hey here is the money good luck kind of thing but like you know typically when they go raise their next round we will invest and keep we keep investing. So for others it's very important that we have a very good sense of you know what their plan is and what their strategy is so we do have a pretty long conversations with them about how they intend to build the company who they want to hire what do they think about competition and so forth. And through these long conversations you can get a sense of whether you know what they're building in at least in our minds and you know we've been wrong in many situations as well. Whether whether we think this is some this is a risk we're taking from one point of view right so.

 

Sonali - I mean can you share an example of when if it has happened that an entrepreneur or a founding team came in and as such they were saying the right things but things just didn't seem right for some reason.

 

Arun - Yeah. So I mean I'm just trying to think of a good example. So usually what ends up happening in these situations is that because it's early enough there's no right answer. So a lot of it is best based on our belief to a certain extent so there have been situations where we. I will give you one example. I mean I won't name names. So I recently spoke to an entrepreneur you know great product great idea great traction. But when I did the customer calls the customer said well we haven't deployed the product yet. Right. So you know I mean we talked about it. This is what we intend to do but we haven't deployed  so.

 

Sonali - And did they say why.

 

Arun - Well they I mean they they  filed it in the trial nobody was using the product. So the idea was you trial with a small portion of the company of the customer company. Nobody used it. So they said they want to hold up on deploying widely right.

 

Sonali - Got it.

 

Arun - But in the meeting at least and maybe I just misread what what what was being discussed but it seemed like you know they had this customer. So this is not that common but I think the challenge is always kind of balancing what even we hope that can be achieved versus the reality right.

 

Sonali - Yeah yeah.

 

Arun - And we have to go in stages so there's a lot of ambiguity at this stage of of the companies so we try to fill in all the pieces. But sometimes you can never fill.

 

Sonali - There's only so much you can do. But this due diligence would generally last for how long.

 

Arun - So I would say anywhere from 2 weeks to four weeks sometimes it can last longer. You know if you can get people on the phone and things like that. But generally we try to move pretty fast.

 

Sonali - Well that's pretty quick. Yeah so you see whether you like the market you see whether you like the team you do your due diligence. And then finally let's say you said I think it makes sense so then what happens.

 

Arun - Yeah so so. So typically as a process with due diligence like I said customer calls personal references everything. During the process we also have the entrepreneur come in and meet the rest of the team. So at Storm we I mean I believe a lot of VC firms might do this but at Storm we'd really like to get everybody on board in terms of making a decision and also you know there's so much experience in the firm that during the diligence process they can tell us Hey by the way you should meet this other company I spoke to that might do something similar a few years back or talk to this person and this is what I think and that kind of group feedback really helps us at least narrow down the right set of questions to ask.

 

Sonali - Yeah.

 

Arun - Because I think you know one of the things and we can talk about this more is VC is interestingly very you know it's it's a very humbling business because we're always in the room with people who know more about that specific subject than we do. Because they have been spending years building companies.

 

Sonali - See that's is a great point right. I mean I am sure there's like 80 90 percent which is like okay you know I'm not even interested.

 

Arun - Yeah.

 

Sonali - But then there's a 10 percent which is just amazing. How how do you how do you put yourself in a position where you feel that you can make a go no go decision given that the other person is so much more of an expert.

 

Arun - Yeah so. So you're right. I mean unfortunate. So for us we we just have to rely on the advice of people who are a lot smarter than us right. So that's why it helps to have a large network you know bought from you know other entrepreneurs we've talked to people in our portfolio companies you know people we have worked with throughout our careers our friends pretty much anyone we can get advice from. And and yeah in pretty much every situation you know I I will not have the answer to these questions so we try our best to talk to as many people as we can. We read a lot so and you know just talk to a lot of people and then at the end of the day I mean you form a thesis on where you think the industry is moving and I mean especially early stage investing you're just betting on the people. So we spend a lot of time with entrepreneurs before we invest. You know just getting involved meeting them for coffee asking them questions about various things and just chatting right because at this stage it's completely betting on the entrepreneur. I mean you can talk all you want about fashion and deals and you know the idea.

 

Sonali - So are you like a good reader of people. Would you say that.

 

Arun - I don't know.

 

Sonali - You have to be.

 

Arun - I think it's too early in my career to say that. I hope so.

 

Sonali - But I think that's the sense that you are developing.

 

Arun - Yes.

 

Sonali - Yeah.

 

Arun - I think that's a very key skill. You have to be able to judge people well and in many ways right I mean this is true of even operators right. When you're hiring people for you know to work with you or your team. You have to judge them and you often have to do that in fairly quick interviews.

 

Sonali - I mean have you maybe you don't think about it consciously but apart from the goodness of the company itself are there qualities that you look for in the entrepreneur.

 

Arun - Yeah so I think I think for me the main one is passion. I mean you can tell sometimes when you meet the entrepreneurs they're so passionate about this space right. Because the reality is you know no company always goes through good times right. There's so many bad times and you have to be really passionate and committed. So I guess passion and I would say commitment maybe both are tied in some sense but you really need that to kind of get past all these hurdles and you know you sometimes you see those on board meetings as well. But I would say that's one I think not in a specific order but we look for obviously intellect because you know these are fairly I mean pulling a  company is a fairly complex process. We look for empathy because at the end of the day this is about people right. I mean this is their lives their families and so forth. So it's not like we want someone who's like so focused but you don't care about your employees.

 

Sonali - Yeah yeah.

 

Arun - Again like I said this is like a long journey. Yeah. So I would say that.

 

Sonali - Superman & superwoman.

 

Arun - Yeah essentially I mean you have to be I mean it's I mean when you meet these people it's amazing entrepreneurs really are a very rare breed. They've been devoting their lives to something and it's very exciting to work with them.

 

Sonali - So I think you gave us a very good idea about the process what will also be helpful is if you can tell us that the different roles in your company. So like there's a there's a partner layer, you are a principal, there are associates?

 

Arun - Yes.

 

Sonali - VC associates. So what are the different roles doing.

 

Arun - Yeah so I think at a very very rough level it generally goes starts from an associate. You have senior associate you have a vice president you have principal and then you have partners and partners can have general partners and then regular partners. So this is rough and you know different firms can have more or less roles. And in general the partners as the name suggests are sort of the more senior people in the front and they are usually the people who go on the boards of companies and then they usually have the final say in whether we invest or not invest.

 

Sonali - And will each partner have a specialization in that kind of industry.

 

Arun - Yeah so so it varies. I would say in the small that is just widely true just because of the number of areas you have to cover and it doesn't make sense especially in large partnerships where everybody does everything right. So you want people to focus because over time you want to build you know as much expertise as you can. In general for people starting out you often go sort of a mile wide and an inch deep but over your career you definitely want to go deeper in certain sectors. Right.

 

Sonali - So in your case I think it's.

 

Arun - Yeah yeah so I do digital health and security. So these are kind of the two main thing but again Storm being a relatively small firm in terms of team you know I've looked at sales marketing HR pretty much everything.

 

Sonali - Hmm. Okay

 

Arun - But those are the areas I want I want to focus more on.

 

Sonali - I see.

 

Arun - So you have the partners. Principals you know at some level start doing their own deals. So they lead deals which is essentially they do the screen I mean they find them. Sourcing everybody does which is finding everything. But then you do the diligence which again a lot of a lot of levels do. But then you kind of lead the deals in the sense that you might end up being on the board or you are responsible for the investment.

 

Sonali - Okay . I mean you said responsible like making it a success.

 

Arun - Yes. So you are the one who is the main point of contact. Let's say with the entrepreneurs you go to board meetings and so forth.

 

Sonali - Okay.

 

Arun -  And then below that you have sort of vice presidents, senior associates and associates. As you kind of go down the chain you move more from working with the company to sourcing the deals.

 

Sonali - Okay.

 

Arun - So so you know you would spend your time let's say going to conferences.

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Sonali - Just finding companies.

 

Arun - Finding companies.

 

Sonali - Because that was something I'm curious about because here it's all about finding that company as soon as possible and being probably the only VC fund if possible.

 

Arun - Yeah.

 

Sonali - Although I think you guys ask always like who else is investing in you as a form of validation.

 

Arun - Yeah. So I think VCs are very interesting in this because we do compete but also we collaborate a lot because you know if you're very early you're right if it's a small amount of money there isn't room for everybody but as you kind of scale you want other VC firms to come in because you know you're raising a large round it's unusual that one VC firm will put in all the money. I mean typically you can if the checks are still reasonable and you are a large fund but it also helps to have multiple VC firms because again you're growing the support base for the company. At the end of the day once we invest the goal is just focus on whatever makes the company a success right . So so it helps to work with others in that process. So, yeah it's always interesting dynamic in the sense that on some deals we are competing and then other deals we are working together.

 

Sonali - Yeah.  I'm sure you guys bump into each other over here.

 

Arun - Yeah yeah I mean we meet people all the time you know a lot of offices a lot of friends in the industry a lot of classmates. And yeah it's it's always fun.

 

Sonali -  So I think one thing which is also coming out for me is that your network is very important right because you're using it for conducting due diligence and then you are using it also to help the company.

 

Arun - Yes.

 

Sonali - So so.

 

Arun - And also for sourcing.

 

Sonali - And for sourcing actually yeah. If you were to give me a very rough approximation of like hundred percent of your companies what percentage is you know the founder reaching out to you, what percentage is you reaching out the founder what is like a referral.

 

Arun - Yeah. So these numbers are very rough and I could be off but I'm guessing to a certain extent here I would say at Storm because we've done a fair bit of work in the enterprise space Storm has always invested in the enterprise space. I would say let's say about 40 percent are people reaching out to us 40 to 50 percent. And then about yeah maybe like 20 percent you know yeah maybe 40 percent people reaching out to us about 30 to 40 percent referrals through our network and maybe 20 percent us going out and finding companies.

 

Sonali - I see. Okay.

 

Arun -  Again this also varies based on sector. So if you have done investments and you've done a lot of investments in security and marketing and so forth. So there our network is stronger our brand is stronger so people reach out. But for example digital health is a little more recent focus for us so there it will be more a bond.

 

Sonali - I see I see. Yeah how do you build your network.

 

Arun - Yeah so I think a lot of it is. So you start off with the the initial network right which is you know your friends your colleagues people you know and then you kind of look for common connections so let's say I'm interested in digital health I would look for you know friends of mine will happen to know positions or people who work in health care networks and so forth. You go to a lot of conferences where you happen to meet people you follow up with them. Definitely a lot of coffee chats that you have to kind of do.

 

Sonali - But you set them up yourself.

 

Arun - Yeah so you need to reach out and over time it goes both ways right. So once you you build a little bit more of a of a network and then you know maybe other people start to reach out to you.

 

Sonali - So that's another great point right that in VC how much of it is the brand of the firm and how much is it how much of it is the brand of the individual investor.

 

Arun - Yeah. So I think I think it varies and I think at least in my case at this point it's all the brand of the firm right. So over a course of a carrier as you get more senior I think people do start to build their own personal brand just by virtue of the fact that you have worked with a lot of companies. You know a lot of experience personally. You publish content right you can publish blog post which is which is you know which is happening a lot these days.

 

Sonali - I mean here do you do that.

 

Arun - Yeah. So I mean we are trying to do more of that here. There are a lot of VC firms that publish content continuously. I think you know First Round for example is very well known for publishing some of the best content in the industry. And you know I just started writing some things on digital health but I think with that over time people do tend to build personal brands. I think also for entrepreneurs it's one thing that's important to realize is that you might come to a VC firm but at the end of the day it's really important for the entrepreneur to really understand who you're working with because yes it's the VC firm that's investing in you but it's the partner you work with for many years especially the partners on your board.

 

Sonali - Yeah.

 

Arun - So it is a very relationship based industry in that sense.

 

Sonali - Yeah yeah. So you want to make sure that people understand who you are.

 

Arun - Exactly. So I think over time your personal brand becomes very important but its hard to build that early in your carrier.

 

Sonali - Right right okay. And then another thing I wanted to touch on is if you can briefly tell us how a VC fund is structured as you said that you just recently raised your 180 million dollar fund right. So what is that process like.

 

Arun - Yeah. So a fund is basically I mean as it sounds right a certain amount of money you raise you know to invest in companies typically funds last. Again this varies wildly but lets say 10 to 15 years. And the idea is you invest in the first three years of that so you raise the money you invest in the first three years following that. And then because as I mentioned it takes 7 to 10 years for the company to eventually exit and so forth. Sometimes it can be early sometimes can be sooner the money comes back let's say in years seven eight nine ten right.

 

Sonali - Right so you have you complete the full cycle.

 

Arun - That's a full cycle.

 

Sonali - Okay.

 

Arun - Now what do you do is let's say investing in years 1 2 and 3. Now with the money so at 3 you're done right. You have put all the money out and sometimes the money last longer because like I said we do follow ons. So let's say you invest half the money of the fund but then you reserve the other half.

 

Sonali - For follow ons.

 

Arun - For follow ons so that might go further. But typically let's say you're three and I get I'm using rough numbers but you raise your next fund so you're working on fund two from years let's say four to six which again will return from six to thirteen or something.

 

Sonali - Yeah yeah okay.

 

Arun - So that's why. So every three to four years and sometimes it's sooner than that firms raise the next fund.

 

Sonali - Got it. And generally that fundraising is being done by partners I am guessing.

 

Arun - Partners yeah the general partners and the managing partners as their core.

 

Sonali - And who is who is investing in that fund.

 

Arun - So that's what that's usually our limited partners. And and these can be anyone with capital it can be like pension funds university endowments wealthy individuals so they typically a lot of the large fund large pension funds and so forth. Think about portfolio management and by that I mean which asset classes do you put money in. Right. So they generally put a portion into let's say venture capital and private equity so that's usually a good limited partner because their large funds are very stable. They'll tend to keep investing.

 

Sonali - Right. So they will have their own investment strategy.

 

Arun - Exactly.

 

Sonali - And I'm guessing this is also all relationship based right your partners will have relationships with all of these firms.

 

Arun - Yes, exactly. It's very helpful to have a stable base there because every time you fundraise you don't want to go out and meet an entirely new set of investors because it just makes the process more complicated. So it's like when the coin is flipped right.

 

Sonali - Yeah now you are like where's the money. This is what makes us so good.

 

Arun - Yeah.

 

Sonali - That's what like networking is so key here. Do you think if someone is just like a shy timid person but very smart would you recommend like going to VC.

 

Arun - So I mean I think I think it will be difficult primarily because I mean it is a like you said a relationship based industry right. Now there are roles within venture capital firms especially some larger ones where you can be an analyst. You know where you work more on the financial side and we can talk more about how VC is saying but VC is changing but there's also sort of some of the firms are doing a more service based approach where you know you help you help the portfolio companies in marketing and sales and finance and so forth.

 

Sonali - When you say service like they're charging for that.

 

Arun - No no. So you invest in a company but you also have a team.

 

Sonali - Doing all that stuff for you okay okay.

 

Arun - Or at least getting you started right. So uh.

 

Sonali - That's very awesome.

 

Arun - Yeah so so it's almost like an operating role within the VC firm. Maybe there are better ways to strive it but that's one way. But so it could be a fit there. But generally it would be hard.

 

Sonali - It would be hard now that make sense yeah. Actually that's a good point that you bring up that some of these companies are now offering this operational kind of stuff also inside the fund. So clearly your network is a big part of the value that you add like you will connect them with the right people.

 

Arun - Yeah.

 

Sonali - Apart from that what else. And then of course there's the funding. But apart from that do you think there are any other places where. How does a VC work with their portfolio companies.

 

Arun - Yeah. So once we invest there's there's a number of things we do so obviously you know depending on the size of the investment we might have someone on the board. Right. So so as part of the board you work with the founding team and executive team on decision making. So any kind of major strategic strategic decisions and so forth you are involved. There's things like more tactical things like recruitment which we know we help them hire people for various roles.

 

Sonali - But is that is that sourcing or is that like a thing that he or she is a good guy or gal.

 

Arun - Yeah so generally what would happen is for example for example what would happen is that the team is growing and then they realize we need a VP of sales. So we would look in our network and say hey this person worked in one of our previous companies he might be looking. You should talk to him right. So it's a lot of it is just making connections and then the executive team ultimately has to decide if they're a good fit.

 

Sonali -  I see. Okay.

 

Arun - Right. So so for example that's one. Then we can obviously make introductions to customers and partners . So for example in digital health I made a couple of investments and you know for our companies I mean given some still building my network there but you know I can hopefully make some introductions to hospital and health care networks that that any new company can can work with.

 

Sonali - Got it.

 

Arun - So then there's that. We also spend a lot of time trying to organize events for our companies. So you know we bring in speakers who are experts in let's say security or marketing and have our portfolio companies come in and talk to them. So and then we also spend a lot of time connecting our portfolio companies to each other. So Storm over the course of its life has I don't know the exact figure but it's something like 150 companies. So not all of them active at this point but it's always helpful for those CEOs and the VPs and all to talk to each other because a lot of times they will understand their problems.

 

Sonali - I mean do you all get similar problems. I mean in terms of do you try and make your portfolio in a way that this company can actually like they complement each other.

 

Arun - Yeah. So I mean I wouldn't say there's like a grand thesis but like our master plan. But we do take synergies into account when thinking about investments so obviously if there is a company in our portfolio that can help this company a lot and vice versa then there is some synergy because you know you can accelerate one company’s growth to other. And obviously that's not the primary reason but if the opportunity exists we should we would definitely make the connection and then let them figure it out whether it makes sense.

 

Sonali - Right right okay. All right. This is really really helpful I wanted to ask you hits and misses.

 

Arun - Yeah I mean.

 

Sonali - Actually let's talk about the misses there are a lot of hits on your website.

 

Arun - Yeah yeah.

 

Sonali - So people can check out your website.

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Arun - Well so I haven't been a VC for long so I will I don't I don't know which ones are like have been true misses but I think for me I would say the main misses generally happen when I don't act fast enough. So we talked a bit about the process earlier right. So you know I need them then I do my diligence have to meet the team and then the partner meeting and then the investment decision. So the good company is especially when you have a great founder. They would obviously be a lot of other VC firms interested in investing right. So not only venture capital firms strategic firms large angel investors a lot of people can can try to come in. So and so you have to be quick in some sense right and make a decision quickly so I would say that the vast majority of the deals that I try to you know give them a term sheet and we can talk about what a term sheet is but I have tried to give a term sheet to or get into the deal. I've missed out on our primarily because I haven't been fast in on making decisions.

 

Sonali -  So when you say missed out so the founder was trying to raise X amount of money yes and the X amount was already put in.

 

Arun - Put in. Exactly. Exactly.

 

Sonali - But then the founder doesn't want more money.

 

Arun - Well they do but you open up to raise money in stages because the challenge is that if you raise too many you only want to give up a certain portion of your company at any round right. So if you have to use I'm just going to use numbers for the sake of making the math easier but let's say you're raising two and a half million at a 10 million valuation so you are you giving up 25 percent of the company. Right. Let's say there's enough interest to put in all 10 million right. So you know you can obviously raise the valuation but then the question is you have to be very careful that you don't raise money at a very high valuation because your next round has to justify next on you want your next round to be a step up from this one.

 

Sonali - I see. Yeah.

 

Arun - And if you don't have the right metrics in terms of growth and traction and things like that the next round won't be a step up. So it's a balancing act. You want enough money but you don't want too much money. You want to plan your evaluation and your growth carefully.

 

Sonali - So can you name any misses. Will you?

 

Arun - I don't think I would name any misses. Well I mean part of the reason is I don't know which ones are really true misses because I don't know what where they'll end up. I definitely learnt a lot. I think part of that part of the you know we can talk about nice things about being a VC but I think one of the best things for me is just meeting entrepreneurs pursuing so many new ideas right. And there's definitely I definitely wanted to invest in a lot more companies than I ended up in.

 

Sonali - And I am sure you have sort of you want to invest a certain minimum amount of money like you won't invest let's say if like do you have a minimum actually.

 

Arun - Yeah. I mean given our fund size it doesn't make sense for us to write like 50000 checks 50000$ checks because then we would have so many companies so generally we try to invest at least at a minimum let's say a million. I mean we've gone below that very rarely but we want to invest a certain amount because A there's only so many companies that the team can manage at any point. So we want to have meaningful investments in them otherwise there's no point.

 

Sonali - There's no point yeah. And you mentioned term sheet which is basically the terms of the investment.

 

Arun - Yeah.

 

Sonali - Okay.

 

Arun - So generally what we do is there's when we are when we decide to invest we give companies what is called a term sheet. And you know your listeners can look this up on.

 

Sonali - Yeah you can google it.

 

Arun - Yeah. But it's a summary of the terms that outline an investment like for example the board structure the valuation how much you are investing and things like that. And terms sheet generally have a summary of all the terms. There's a legal process where you actually outline their final legal documents but it's essentially a way to indicate and formalize our interest and generally both parties have to sign for it to come into effect.

 

Sonali - Yeah. And actually you mentioned like how you know as a VC you've come across some amazing entrepreneurs amazing ideas. Is there anything that you believed in earlier which you do no longer believe in having spent some time in this industry. So I can give you an example I was listening to something by Paul Graham and he mentioned that they used to over index on intelligence sometime back and but now they're like you know maybe it's determination and that kind of thing which probably matters more than just pure intelligence. And again I could be misquoting I don't want to be quoted as that's what Paul Graham said.

 

Arun - No no no I mean it makes sense I'm just trying to think I will definitely agree to that I when I first started out investing I was definitely a sucker for good sales people because I would be like what every investment looks amazing not that they were bad investments but I think I think over time I've come to appreciate the nuance of of investing. I mean definitely you can read people. I think the ability to ask the right questions and the questions do vary from company to company you see. Is is is something that might seem simple but it's actually very very difficult to actually pull off in the right way because based on the stage the entrepreneurs the growth the customers because you only have like an hour or two hours with the entrepreneur right. So you have to maximize that time very well especially if you if you do end up investing. I think the ability to ask the right question and then also take you know a hard look at your failures. And again for me there haven't been any since I mean I have been here for a short period of time but I think in just talking to you know sort of more senior folks you have to be very open and really thoughtful about what you did wrong. And I think that's hard to do because people don't want to dwell on their failures.

 

Sonali - Yeah.

 

Arun -  Yeah.

 

Sonali - Have there been. Okay you haven't had any failures.

 

Arun - I've only been here for less than two years so I mean I've only made on my personal investments I've only made two investments. So hopefully for a while.

 

Sonali - Still yet to see what will happen.

 

Arun - Yeah yeah so it's still early for me.

​

Sonali - Okay. And what do you think is the future of VC then especially you know with companies like Angel list where you can just go with the syndicate and.

 

Arun - Yeah. So Angel List I think by the way is fantastic. I think I think just bringing giving access to to for startups to access a wider pool of investors is always fantastic especially as sort of the costs of raising starting a company have gone down so much that you don't really need that much. So I think that's great I think I think more and more venture capital will move towards more data driven kind of model. And the idea is just given the vast amount of startups out there you need some way to really sort of process process all the noise and find the right companies because you know there's thousands of startups being started every day right. Any topic you pick if you even go look on Angel list or just google there are so many companies. So I think I think filtering that will be a key skill set for any VC.

 

Sonali - Yeah can you imagine like a AI powered VC fund. Yeah I mean I can imagine that happening.

 

Arun - I think I think you can I think that that will work to a certain extent if you focus purely on the financial portion of the business right but.

 

Sonali - Just in identifying the company.

 

Arun - Yeah but I think there's still I mean obviously there will always be I think it will still be hard for anyone to really kind of automate the people aspect right like being able to think about and working with the entrepreneurs and whatever value add after that right. So I don't think that part will go away but you know I think being more data driven you know following the right metrics is important. On top of that you know we've talked about sort of the more service based approach we really want to kind of get your companies up and running quickly. Because some of the basic you know things you do as a startup there's a lot of common things really does. Right. How you set up your sales process and all that. Not that not that they're all the same but I think providing the right support for that is something.

 

Sonali - At least getting them started yeah yeah yeah. Okay. So now I just want to get into some of your day to day aspects so like on a typical if there is a typical day like what are the kind of things that you would be working on.

 

Arun - Yeah so it's usually a mixture of the things we talked about either you know let's say I'll be at a conference or meeting entrepreneurs outside just to get you know just to see if this is someone the firm should spend more time with. Doing diligence or doing customer call or doing a personal reference call or just talking to industry experts about something or or you know I'm at a board meeting or talking to a portfolio company and getting their.

 

Sonali - This is lot of travel?

 

Arun - Well so for us a lot of our investments are in the Bay area so there isn't as I don't have to get on the plane often but I am out of the office a lot.

 

Sonali - Do you spend any time in office or is it just like Fridays.

 

Arun - Ah no I mean Mondays you're mostly in the office. And then yeah I mean there are days when I'm in the office quite a bit and there are days for example I am in San Francisco all day just meeting with people.

 

Sonali - Just meeting people.

 

Arun - Yeah.

 

Sonali - But I guess it's also because you're a principal by the way I did want to ask you how much time does it take to go from one level to the other because you're two years out of business school and you're already a principal.

 

Arun - So I joined as a principal.

 

Sonali - Okay that's because you had prior work ex.

 

Arun - Yes. So associates are typically people out of undergrad or maybe one year out of undergrad.

 

Sonali - Okay.

 

Arun - So you do have associates senior associate. Again this varies widely across firms. So so it's not don't take this as like a a given. And then typically vice presidents and principals are post MBA.

 

Sonali - So after MBA you will join as a VP.

 

Arun - Yes typically. Again it varies but typically.

 

Sonali - And then partner is.

 

Arun - It varies by firm. I think it's usually a measure of how well you do. So you know in kind of all three aspects right sourcing sourcing diligence I think are kind of the more initial aspects but then finding deals and kind of helping grow the company.

 

Sonali - Okay. I think I think for a lot of people it is sort of you can make out how a VC fund makes money, you're investing money you get a multiple find investors to get it in some way.

 

Arun - Yeah.

 

Sonali - But as the people who are working in the fund right are partners and principals do you have a share in the in the fund or in the in the returns how is that.

 

Arun - Yeah. So typically you know there is what is called Carry. So the idea is the most common fund structure as far as the fees schedule goes is you have what is called broadly the 2 and 20 process and it varies. The numbers can vary but the idea is you have a management fee which is about let's say 2 percent of the fund every year. And again.

 

Sonali - That's a salary.

​

Arun - Exactly that's space for the office expenses salary of the people working here and things like that. And then you have the carrier portion which is if in this case if it's 20 percent you would get 20 percent of the returns of profits.

 

Sonali - Okay but how is that. So basically what you're saying is if you raise 180 million dollars in the fund two percent of that is your salary expenses right. And then 20 percent of the return is again with the VC.

 

Arun - Yes.

 

Sonali - But is that distributed equally across the different levels.

 

Arun - It varies widely.

 

Sonali - Okay.

 

Arun - So the partners obviously will get more and then it kind of goes down to.

 

Sonali - But it is like as an associate you could have a share of that 20 percent.

 

Arun - You could or you could not.

 

Sonali - Okay.

 

Arun - So every fund again that's a very sort of personal thing to the fund.

 

Sonali - Okay. So they will. Okay.

 

Arun - Yeah.

 

Sonali - So it varies but it is not unheard of. Got it. Okay right. So going back to the day to day thing basically if you are an associate you're probably spending a lot of time doing research or talking to firms or if you are a principal you're probably working a lot with your portfolio companies helping them out okay.

 

Arun - But I think just still doing the research and talking to people because that's how you have to keep up with what's going on. Right. So I think that talking to people in the research part for everybody has to do. I think your responsibilites kind of increase the more senior you get.

 

Sonali - Right right. So you already mentioned a couple of the interesting aspects just in terms of the breadth of amazing entrepreneurs and ideas you are coming across anything else that comes to mind.

 

Arun - No I would say that's the most exciting part. I think just working with the people I mean you know I think spending time with so many smart people across so many industries every day is is I can't think of any better job than that.

 

Sonali - Yeah actually let's say someone is like you were yourself right like you were waiting for the right idea. What would you say to someone if they're choosing between an entrepreneur and a VC.

 

Arun - Yeah. I mean this is just my view but I think again I haven't founded a company so maybe I'm not the right person to ask this question. But the way I look at it is again passion right. I think if there's an idea that you think is so amazing and you think about it all the time and you really want to go build a company around it I think you should give it a shot. So I think it's it's about your connection to that idea and then you know some people. And you know we haven't talked about sort of not necessarily a downside.

 

Sonali - No we will talk about it that's my next question.

 

Arun - Okay we can talk about it now but but one thing is you know no matter how much we talk about the value that VCs add at the end of the day it's the entrepreneurs pulling the company right. We are we're just on the outside. You can you know we help as much as we can but there's very little at the end of the day that we can do to truly truly impact the company. So you have to be comfortable with that. Right. So you can invest and make this company help make this company I should say a great success. But at the end of the day all the credit goes to the entrepreneur. Rightly so because they have done all the work and.

 

Sonali - So I mean are you saying that if you are someone who is a little bit of a micromanager kind of person that's not a good.

 

Arun - Yeah yeah.

 

Sonali - Attribute for a VC.​