Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed! While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Yash has been an investor at Benhamou Global Ventures for more than four years. He also heads the Arka Venture Labs, an accelerator platform for India based B2B companies to scale up globally. Yash focuses on intelligent automation, robotics and customer centric applications powered by a combination of enabling technologies such as AI, ML, Blockchain and computer vision.
Prior to BGV, he was one of the first engineers at SpiderCloud Wireless, a venture backed bay area startup building indoor wireless systems.
Yash graduated with a MBA from Kellogg School of Management, MS in Electrical Engineering from University of Maryland and bachelors in Electronics and Communication Engineering from the National Institute of Technology Karnataka, India. He is also a fellow of the Startup Leadership Program, Silicon Valley and has been board member at various non-profit organizations.
VatorNews: What is your investment philosophy or methodology?
Yashwanth Hemaraj: Just a little bit about BGV: the fund was started Eric Benhamou, former chairman and CEO of 3Com and Palm. At BGV, we are diverse set of investment partners, and we have probably about 300+ years of combined enterprise company building experience. All of us have been operators in the past, and we like to partner with entrepreneurs who think big and who can also benefit from our backgrounds.
We invest in companies that are contributing towards the digital transformation of enterprises. We take a thesis-driven approach here, where we seek out entrepreneurs who are disrupting traditional markets using a combination of technology, such as AI, ML techniques, blockchain, intelligent automation, etc. We look at business outcomes in the form of productivity, agility, resiliency improvements, so we put an enormous focus in evaluating how these start-ups are focusing these business outcomes. And, finally, we invest in the infrastructures and platforms that support this digital transformation.
Typically, we believe in building global companies anchored in Silicon Valley, so a majority of our portfolio come from founders that have had their in origins in regions outside of Silicon Valley; about 50 percent of our portfolio come out of Israel, France, Spain, the UK and now we are actively pursuing India as a source of enterprise companies that are targeting the global markets.
Finally, we take an active and unique approach toward company building. We assist our companies to validate their technologies and scale their business globally. We take a hands on approach, roll up our sleeves and work with our entrepreneurs to solve their day-to-day challenges. The beauty of enterprise companies is that they are very structured in their growth process. We like our entrepreneurs to make new mistakes but not repeat the same mistakes that we have made in the past. So that’s, in a nutshell, the key philosophy behind BGV.
VN: You said you invest in enterprise companies. What is the opportunity that you see in that space?
YH: If you were to look at what’s happening within all traditional industries, financial sectors, healthcare, retail - both brick and mortar stores or e-commerce, manufacturing, transportation, logistics, etc., all of these industries are facing the "impact of Amazon." Basically, more and more enabling technologies, such as AI, IoT, big data and machine learning, they have contributed towards some of these behemoths having an unfair advantage in terms of go-to-market and operational efficiencies, etc. That has really disrupted some of the traditional players in the industry, and it is forcing them to very rapidly digitize their assets, implement intelligent automation techniques, learn from the historical data and make predictions into the future, and thereby realize operating efficiencies and become competitive with the Amazons of the world. That, overall, is what digital transformation enables across all industries. We invest in entrepreneurs who are helping in this macro opportunity. While the majority are well underway in their digital transformation, there’s still a lot of industries, especially some of the traditional industries, that are just coming on board to this digital transformation cycle.
An important byproduct is data. The amount of data that is being generated from sensors, from systems of record, from interactions, has skyrocketed and so it also generates new opportunities around intelligent data storage, around faster data processing and faster analytics. Data is going to take an increasing role in this digital transformation of enterprise.
One key thing in this transformation, as we see it, is that, while there are lots of companies that are being formed, there is a very important operating “experience gap.” These startups that are focusing on this digital transformation, face a lot of challenges as they try to become global and try to scale up. The challenges could be around market access, could be around creating and formulating strategic relationships within the ecosystem. B2B company building is a very structured process, so these guys need a lot of hand holding and mentorship around tackling of the challenges. We help derisk them much ahead of time. This is where our operational experience could be very relevant.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
YH: BGV has an active portfolio of about 30 companies right now, and these range between three major technology clusters - cyber security; as you can see, cyber security is becoming a very important aspect of businesses such as risk assessment, access management, authentication, zero trust security. The second area that we focus on is cloud; within cloud it could be cloud infrastructure, cloud applications or cloud driven analytics, which includes AI and ML techniques. And, finally, we are investing in industrial IoT, robotics and Mobility.
Many of our portfolio companies are from outside Silicon Valley, primarily Israel, Western Europe and India, and we help them make a transition to the Valley. This is a general segmentation of the BGV portfolio.
I have primarily been focusing on mainly intelligent automation of the workforce and customer-centric applications. I’ll give you two examples of companies in which we have invested recently.
One of the companies is Totango. They are a leader in customer success management solutions. They enable organizations to manage their existing customers, increase the retention of the customer, and increase upsell opportunities, thereby also reducing churn. And why is this very important? If you were to sit in on any analyst call today, you’ll see the amount of enterprise value that has been attributed toward recurring business, and the multiples that companies with good recurring revenues get, is way higher than what traditional licensing companies get. Every business model today is being converted from a traditional license model, a one time payment, to a repeat, recurring business model. So, this creates a very interesting opportunity to design your enterprise operations by putting customers in the middle; the customers will only renew your product if they are happy with the service. You really cannot take reactive approach wherein you go and fix the problem only when the customer complains do; you have to anticipate what customer is doing with the product, where the customer is deriving value, and you need to take a proactive approach in helping the customer realize value in the products or services they have bought. That is solely in the domain of customer success management.
Totango designs intelligent operations around customers by putting customers in the middle. It collects data from multiple data sources within the enterprise and creates a very unique customer data platform. And, finally, it allows multiple kinds of engagement with the customer. We call it "e2c," enterprise to customer. How do you design your entire operation around the customer? Their development organization is based out of Israel, and they have an entire go-to-market team present in the Valley. This enables them to have a unique capital efficient model and really focus on making their customers happy and successful. This is a very interesting space, and if you were just to go by numbers, if you just look at the number of enterprises hiring and recruiting customer success managers, VPs and directors, that is an indication of the opportunity that is within enterprises today.
Another example of a company that is in the manufacturing and analytics space, it’s a company called Drishti. It’s a spin-off from SRI that we funded along with Andreessen Horowitz. Emergence Capital led the Series A, most recently. This is one of the deals that I was involved with right from the beginning, along with my partner Anik Bose who led the investment. What is interesting about Drishti is that they are focusing on the same efficiency and productivity improvements and reducing errors in a factory floor setting. Drishti’s technology sits on top of workstations within factory floors and it detects actions so factory floor managers are able to identify efficiency gains or efficiency loses and take corrective actions. They’re able to identify errors in the process and, at the same time, make the entire factory floor pretty agile.
Today, if there was a process such as somebody assembling a computer unit, you have to perform repeat operations such as assembling the motherboard, connecting the fan to the motherboard before shipping. Lets say someone forgot to plug the fan, the only place that you know an error has occurred is only after the equipment has completely shipped and it comes back with a burned motherboard or something like that.
With Drishti being in manufacturing floors, you can identify the errors that happen, in this particular case the fan not being plugged into the system, you right then and there and take corrective actions. If any other error is identified way down the line, you can come back and look at what happened during the manufacturing process that led to that error, so that thereby you can learn more from your past operations.
So, these are some of the examples of companies that we’ve been investing.
VN: What do you look for in companies that you put money in? What are the most important qualities?
YH: Let me give you an idea on the area under stage that we are coming into the company. Either we invest in late-seed or Series A, this is our sweet spot. The definition of some of these terms are changing as round sizes become bigger and bigger and companies are reaching a much more mature stage before they their Series A.
With that caveat, the team is absolutely important. I like to tell our entrepreneurs that, as investors, if we know more about the space they are building a company in, and that’s a very risky value proposition. The entrepreneurs are the experts, they are the ones that have that unique insight about that market that makes them click, and we would like to see what is that unique insight they have. It could be either a mindset that they are bringing from some other industry and applying it in this market, or it could be their own work experience within that industry or segment that they have lived through, that they have suffered and, finally, they have gotten frustrated, saying, "This is not the right way to do things, let me make this better." We like to see that unique insight.
The second thing, in the early stages these guys are not paying themselves enormous amount of salary. They are living on a shoestring budget. They’re really bootstrapping themselves and the only way they can get through this is passion. If founders are not passionate about it, it is very unlikely that they give up a lot. So you like to see that passion within the entrepreneurs on why they are doing it.
Finally, we like to see what I call a ‘minimum sellable product.’ It is slightly more advanced than a minimum viable product. A minimum sellable product is something where you have inner functionalities in place that the customer is ready pay you for the service and the product that you are offering. I like to see that minimum sellable product. This would mean having a certain set of customers who can validate the claims that you are making. Typically, when I listen to entrepreneurs’ pitch, I like to take the seat of a potential customer. In my mind I am trying to understand, what is the life of this customer on a day-to-day basis? What are the pain points that they are facing? And how does this company or the startup that is pitching to us solve that? And, along with that, if I were to pay some dollars for that service, what would be the ROI, or what would be my payback period? Those are some of the things I like to see from a customers’ view point.
Typically, we are the first institutional investors in this round. Round sizes typically range from $6 to $10 million and we lead the round. Given we are taking a very active role in the company building process, I like to see coachability of the team and the ability for entrepreneurs to work with us on a day to day basis. It involves mutual building of trust because that is the most important component of this relationship. So, along with the team’s background and the team’s unique insight and team’s passion, I like to see that they like to work with us on a day to day basis. That means they are open with the challenges that they are facing, and they are open to ideas around solving those problems.
That’s a long answer to your question, but that’s how I try to analyze the investments that we are making.
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
YH: With respect to revenue numbers, we like to seek companies that are making revenues. It would be too hard for us to get an idea of whether it is a minimum sellable product or not.
It is hard to put an actual number in terms of the number that we would like to see but if we were to look at data that Silicon Valley Bank or other sources publish, today you see companies that are raising a Series A round of funding have anywhere from $1 to $2.5 million in ARR. That doesn’t mean that we don’t look at companies on either side, but I’m just quoting industry numbers around companies that are raising Series A.
What we observe is that more money is going into a fewer set of companies these days, so, as a result, the bar for Series A has increased. We’ve seen much more mature companies than we were seeing when the interest rates were 0% in 2014 and 2015 and there was a lot of money chasing these startups. Today, we see much more mature companies.
VN: You’ve mentioned a few times about growing round sizes. How does that affect the startups when they raise their A round?
YH: This is a place where entrepreneurs make a lot of mistakes. One of the typical mistakes that we see is that entrepreneurs do have access to all of these industry reports that are coming out and they generally tie themselves to saying, "an average Series A is $6 to $10 million and we have to raise on the upper end of that."
However, our experience is that, if you’re an entrepreneur who has built a company in a capital efficient way, it is not easy for that entrepreneur to flip the switch overnight and start spending in order to get faster revenue growth. You’re increasing your sales and marketing spend, along with customers success and engineering. You are trying to invest in your go-to-market engine such that you start generating more and more revenue dollars in the future -that’s the venture model. The mistake that entrepreneurs often make go is that they just go by the industry numbers, and try to anchor at a round size or at a dilution level that they feel, "We have to hit this." But what they don’t realize it that it’s not easy to flip the switch, and that’s where our operational experience comes into play.
A lot of times we see that in enterprise business models there are two or three go-to-market engines: inside sales driven, outside sales driven, and named account driven engines. There are a few sales motions that are very relevant to each business, and what we see is that entrepreneurs have one or maybe two of these sales motions that they have cracked, but they want to go from one segment of enterprises to another. The go-to-market engine that you need in order to be successful in all of these things are totally different from each other. So you’ve got to take a much more patient way, and much more structured way, in order to approach the next stage of company building.
With this in mind, we work with our entrepreneurs to right size of investment. Just raise enough capital that it’s sufficient for you to get to the next stage. At time of the investment, we work with the entrepreneurs to define the set of milestones that they feel comfortable hitting. We have a collective understanding of what does success look like for the next round of financing. So we kind of take an approach where we define these things along with the entrepreneurs right at the beginning so that, a) we have not raised too little or too much of capital, and b) we have a collective understanding with the entrepreneurs that these are the milestones that we would take and, by going through this exercise, we know what are some of the activities, strategies or tactics that we need to follow in order to hit those milestones.
So we take this very hands-on, active approach towards getting the companies to the next stage.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
YH: I’ll go back to my roots. I grew up in a small town about 100 miles south of Bangalore, India, and I did my undergrad studies in India. I grew up with a strong engineering and science background at home. I ended up studying engineering at one of the top schools in the state called the National Institute of Technology Surathkal. I came here right after my undergrad for pursuing my master's. I did my master's in electrical engineering at the University of Maryland, College Park and right around that time I did an internship in a company called Flarion Technologies, which got acquired by Qualcomm for north of $800 million.
After graduation after a brief stint at Texas Instruments, I was recruited as one of the first engineers for a startup called SpiderCloud. Collectively we raised about $150 million across five different rounds. I was involved with the company right from the start and that’s where I got the first dose of entrepreneurial experience. Every day it was a combination of recruiting the right people on board, working on some amazing wireless technologies, writing patents, working with the customers, working with our field teams and doing everything, including assembling chairs, drawing wires, everything... It was a close knit group and it was a wonderful working experience. So that’s where I first had this real life exposure toward what start-up company building is about. I worked in that company for about six years across multiple engineering roles, architectural roles, and finally as a product manager of the 3G Wireless line of products. It gave me the complete life cycle experience of being in a startup. Around that time, as I was looking through my own career growth, I wanted to get some formal business training, so I applied and got into the Kellogg School of Management where I majored in marketing and entrepreneurship. Collectively, I think this gave me a foundation of strong technology experience, real life entrepreneurial experience and some formal business training.
As I was looking to my next phase of my career, there was a lot of introspection as well as talking to people within my network for advice. I realized that I really loved being within the innovation ecosystem, I really liked product and I really liked solving tough challenges. If you were to see which industry has the combination of all three, that was the entrepreneurial venture capital ecosystem. Around that time when was the IoT ecosystem was pretty hot so I had my own thesis around, if I had my money, what are the areas I would invest within the IoT ecosystem. I shared my investment thesis with people with operating and investing experience, and that’s when I came across the BGV team. I really liked this philosophy of working hand-in-hand with entrepreneurs, helping them solve the day to day challenges. I thought to myself, "This is going to be a wonderful mixture of product experience, operating experience, as well as investing experience. It affords me a combination of all three."
I realized that some of the easiest parts of venture is making the investment. The hardest part comes from what happens after the investment. The even harder part comes at the time of exit, and the even harder part comes around the fundraising for the fund.
We grew the firm from BGV II to raising BGV III, which was an $80 million early stage vehicle we are investing from, to raising a follow-on opportunity fund, which we just closed a couple of months ago. We are in the process of raising a slightly larger early stage fund called BGV IV. I’ve had a full exposure to this whole life cycle of the venture capital ecosystem and I think this is a place where I can bring in the combination of product, entrepreneurial, as well as experience of my past and really focus on building some valuable companies.
VN: What do you like best about being a VC? What makes you excited?
YH: That’s a very profound question. It’s a question I’ve been asking myself and the answer is very clear: when you look at the next 10 years, you see the amount of improvements that can be done in the enterprise space by removing inefficiencies, by putting intelligence, there is a tremendous opportunity ahead of us. When you look at the advances in technology from when I was in engineering back in undergrad, I’d taken lessons around artificial intelligence and neural networks and we had done some projects around implementing AI at that time. Looking back at that, and looking back now, you can see how easy it has become to collect data, to implement and build these models and also tie it into intelligent workflows. So, the pace of innovation in the world that we are living in has picked up. Now you also add to it robotics that are taking active shape within enterprises, it is just a wonderful opportunity being in this space. It keeps every day interesting.
Secondly, if you look at some of the passion and sacrifices that our entrepreneurs bring into their companies, I mean, some of these entrepreneurs can go to Google or Facebook and command $500,000 to $1 million in salary and perks but they’re giving up a lot of this and are committed to building companies. You look at the vision that they are setting and also the sacrifices that they are making, it’s a privilege and a joy to be working with these entrepreneurs.
Lastly, when you look at the profound impact that you, as a venture capitalist, can make to these companies, when you’re investing in them you’re not just investing in one person but you’re investing in the team around them, and you’re helping them hire more and more people. In fact, in my companies I’m involved in hiring all of the top executive managers, and sometimes even the director and manager levels, and you see the amount impact that you have in contributing to their success, it’s just a very gratifying feeling.
The beauty of the area that we are in is a combination of AI, blockchain, robotics and all of those things accelerating innovation. The second thing is around the passion and sacrifices these entrepreneurs make, and, finally, it’s about the impact that we as VCs can have in the companies we are helping build and understanding that it is not a sprint, it’s a marathon, it a journey. It’s about rolling up our sleeves and having empathy with our founders and working hand in hand in solving some of these challenges for the companies. Those are the thing that really help me in my job on a day to day basis to keep me excited, keeping me energetic.
VN: What is the range of investment that the firm makes?
YH: One of the policies that we have as a firm is that we like to partner with like-minded investors, so most of our rounds are syndicated. In fact, I would say all of our investments so far have been syndicated with other like-minded VCs. We lead or co-lead $6 to $8 million rounds, and we write $3 to $4 million in the initial checks.
We understand that enterprise company building is not a one step process, but it takes multiple stages, so we keep reserve capital across multiple rounds, and we also understand that you need multiple heads around the table so that’s one of the main reasons we syndicate rounds with other like-minded VCs, like-minded angels, who can help the company increase their networks that the entrepreneurs have access to. Most of the time we design these things with entrepreneurs in mind and the company in mind.
VN: Is there a typical percent that you want of a company? For instance, do you need to get 20% or 30% of a round?
YH: It varies on a deal by deal basis. Given that we are very active with our entrepreneurs, we are spending a lot of time with them on a day-to-day basis, we like to have pretty good ownership in the company. It varies company by company, but anything in the 15 to 20 percent range is something that we target. But we are seeing deals on either side of the spectrum.
VN: What percentage of your fund is set aside for follow-on capital?
YH: In our current fund system, we have an early stage fund where we keep up to another 100 percent, which is another $3 to $4 million in reserve.
We just closed an opportunity fund where some of the companies that are scaling up really fast, and we want to help those companies capitalize on the scale-up opportunities. That will enable us to deploy more capital with such companies that are hitting the growth trend. Finally, we are about to raise a slightly larger early stage fund, where we will probably have much more reserves for some of these companies that are hitting the growth stage.
VN: In a typical year how many startups do you invest in?
YH: There are some small seed checks that we write, which are $100,000 or $200,000, but when it comes to the main investments, which are in the range that I mentioned before to you, $3 to $4 million in $6 to $8 million rounds, we like to make anywhere from six to eight investments a year. It depends; sometimes we do five and, sometimes we do seven or eight. We don’t like to spay and pray, we are very focused, we take our time in terms of working with our entrepreneurs to identify the right fit, and that’s where we spend most of our time doing our diligence.
VN: Is there anything else you think I should know about you or the firm?
YH: We started investing in Israel before it became a startup nation and we’ve had plenty of success with that model, with strong R&D teams and entrepreneurs originating from Israel and making a transition into the Bay Area and Silicon Valley in order to grow as a company. In the last couple of years we have been making a lot of investment in France, Spain, the U.K. etc. So, we have had experience in taking these cross border companies and helping them make the transition to becoming a formidable Bay Area company.
One of the things we have been observing is that India has started to generate a lot more companies that are product companies that are focused toward the global tech market. We also observed that these entrepreneurs, are mostly first time entrepreneurs. In a lot of cases, they need mainly three things: one is they need mentorship around the company building process; they need access to the Silicon Valley ecosystem; and, finally, they need capital access.
We recognized this need for these Indian entrepreneurs who are making the transition into the Valley so, in order to facilitate this, we built a platform and we invested seed capital into it. The platform is called Arka Venture Labs and the idea is to find these Indian entrepreneurs, who are building products out of India, and invest up to $200,000 of capital in them and really help them with three things that I mentioned: provide them with infrastructure, provide them access to Silicon Valley ecosystem and provide them mentorship around the company building process. We wanted to make this a very open and collaborative platform. It takes a village to build an enterprise startup so we need more and more people involved. We partnered with India’s top early stage investor, called Blume Ventures, and with another cross border firm called Emergent Ventures. Together, the three of us put in the seed capital for this platform and we are slowly investing up to $200,000 of seed or pre-seed rounds so that we can help them grow some valuable venture business and also help these companies scale globally.
So, why India? Like I said, India has a mixture of amazing talent - computer educated and English educated, and they have experience working in global product and services companies. And now they have caught the entrepreneurial bug and want to really create valuable companies. We see companies with, not just technology differentiation, but also strong economic advantage as they scale up their go-to-market engines.
We just launched Arka Venture Labs earlier this summer, we have done two investments so far, and we are continuing to grow this platform by bringing like-minded angel investors, advisers, mentors, family offices and corporates on board to make this a true open and collaborative platform. We are just getting started with this and we’re pretty excited about it.
We believe is this provides us with a new frontier of building cross border companies in a space where we have a lot of experience historically.
Originally published at https://vator.tv/news/2018-10-17-meet-yashwanth-hemaraj-partner-at-benhamou-global-ventures