20 VC 046 How VCs Evaluate Investment Opportunities with Alan Chiu, Partner @ XSeed Capital

In episode 46 of the 20 minutes VC, host Harry Stubbings interviews Alan Chu, a partner at Xseed Capital and VP at Stanford Angels and Entrepreneurs. Alan shares insights on his journey from engineer to VC, emphasizing the importance of a startup's product roadmap, the need for adaptability, and the significance of technical co-founders in ventures focused on unique technologies. He also discusses investment strategies, including evaluating technical, execution, and market risks, and the value of a VC in guiding entrepreneurs through growth stages. Alan highlights the unique ecosystem of Stanford and Silicon Valley for nurturing successful startups due to talent, resources, and willingness of investors to bet on unproven talent. Additionally, he advises founders on pivots, assessing core business assumptions, and the essential qualities of successful VCs, such as reading entrepreneurs, perseverance, and knowing when to hold onto investments for potentially larger returns.

• Harry Stubbings announces a giveaway of Walter Isaacson's Steve Jobs book.
• To participate, listeners must leave a review for the 20 minutes VC on iTunes.
• The first five people to leave a review and email Harry with the iTunes review name will receive the book.

"So all you have to do is leave a review for the 20 minutes VC on iTunes and the first five people to leave a review will be sent a copy of Walter Isaacson's Steve Jobs book straight to their home address."

The quote is a call to action for listeners to engage with the podcast by leaving a review on iTunes, offering an incentive of a book giveaway.

• Alan Chiu is introduced as a partner at Xseed Capital and vice president at Stanford Angels and Entrepreneurs.
• Alan has a background in enterprise software and data storage.
• He has experience with successful acquisitions, including Bycast by Netapp and Creo by Kodak.

"We are joined today by the incredible Alan Chu. Alan is a partner at Xseed Capital where he specializes in enterprise software and data storage."

Harry Stubbings introduces Alan Chiu, highlighting his expertise and role at Xseed Capital, setting the stage for the interview.

• Harry Stubbings discusses Hiring Screen's smart feedback option.
• The tool allows companies to send personalized messages to applicants.
• It helps improve company brand image by keeping candidates informed about their application status.

"Send a personalized message to your entire applicant pool or create a customized message for your shortlisted candidates."

The quote explains the functionality of Hiring Screen's smart feedback option, emphasizing its role in enhancing communication with job applicants.

• Alan Chiu details his career trajectory and move into venture capital.
• He started as an electrical and computer engineer, then progressed through various roles in startups.
• His experience includes software development, engineering management, product marketing, and product management.
• Chiu's third startup, Bycast, was a success and acquired by Netapp.
• After moving to the Bay Area, he attended Stanford GSB and joined Xseed Capital post-graduation.

"And after that acquisition, I moved my family down to the Bay Area, went to the Stanford Graduate School of Business, and then joined Xseed after graduation."

This quote provides a summary of Alan Chiu's career path leading up to his role at Xseed Capital, highlighting his educational background and professional experiences.

• Alan Chiu's entry into venture capital was serendipitous rather than planned.
• He was considering starting a company after graduating from Stanford but did not find a compelling idea.
• Chiu sought product leadership roles in startups and engaged with venture firms, including Xseed.
• His connection with Rob Siegel, a general partner at Xseed and lecturer at Stanford GSB, led to his joining Xseed.

"It was a little bit serendipitous, actually. It wasn't as if I had a strategic plan to become a venture capitalist."

The quote reflects Alan Chiu's unplanned journey into venture capital, emphasizing the role of serendipity and personal connections in his career shift.

• Stanford is known for its capacity to foster the creation of successful companies.
• The talent and people at Stanford are critical elements in this ecosystem.
• Proximity to Silicon Valley and the San Francisco Bay Area is a key factor.
• The area's density of successful technology companies and startups is notable.
• There is a significant presence of risk capital, such as venture capitalists and angel investors, willing to invest in young talent.

"One of the key factors that sets Stanford apart is proximity to Silicon Valley and the San Francisco Bay Area in general, that in the density of successful technology companies, as well as startups that have been built and being built in the area, as well as the density of risk capital, venture capitalists, angel investors who are willing to take a bet on unproven, unknown young talent, would you."

This quote highlights the unique advantage Stanford has due to its location and the surrounding ecosystem of technology companies and investors willing to take risks on new ventures.

• There are startup ecosystems outside of Silicon Valley where investors take risks, but not with the same intensity or concentration.
• The level of venture investment and risk-taking in other countries may not match that of Silicon Valley.

"I would say there are certainly other startup ecosystems in which investors are willing to take a risk on startups, but not at the same level of intensity, I would say. And it's certainly not nearly the same level of concentration of investors."

Alan Chiu suggests that while risk-taking on startups exists globally, Silicon Valley is unique in its intense and concentrated investment landscape.

• Founders outside the Bay Area can mitigate investor risk by proving their business viability.
• Demonstrating strong customer traction and revenue growth is crucial.
• Building a business that shows the potential to become a multibillion-dollar venture is key.

"One of the best things they can do is to make sure that they're building a viable business and have strong growth in terms of customer traction, in terms of revenue, to prove to potential investors that their idea is more than just a hypothesis."

Alan Chiu advises that founders should focus on developing a solid business foundation with demonstrable growth to attract investors.

• Xseed invests at the seed stage, often before a company has a product or meaningful revenue.
• Their investment evaluation focuses on three types of risks: technical, execution, and market risks.
• They prefer companies with high technical risk due to the potential for a higher barrier to entry in the market.
• Execution risk assesses the fit between founders and the opportunity, as well as the completeness of the team.
• Market risk is the biggest concern, focusing on whether there will be customers for the product or service.
• Entrepreneurs can reduce market risk by showing some level of revenue and strong growth.

"At the highest level, we evaluate each investment opportunity along three types of risks. One is technical risk... The second risk is execution risk... The third risk is market risk."

Alan Chiu outlines the primary risks considered when Xseed evaluates potential investments, emphasizing the importance of technical challenges, founder-opportunity fit, and market potential.

• Xseed's portfolio companies have access to any member of the Xseed team based on their needs.
• The level of support provided by venture firms varies depending on the firm's culture.
• Some firms operate with a broad umbrella where partners work independently, while others have built large support teams for their portfolio companies.

"I think really it varies from firm to firm. It depends on the culture of the firm."

Alan Chiu explains that the extent to which venture firms support their portfolio companies is not standardized and reflects the individual culture of each firm.

• Founders should carefully evaluate potential venture capitalists.
• The fit between the founder and the VC is crucial.
• Founders should assess whether the VC can provide the right kind of support for their company.

"And then what do you think founders should look for in vcs? Is there any way that they can tell that the VC is the right vc for t"

Although the quote is incomplete, Harry Stubbings prompts a discussion on how founders can identify suitable venture capitalists for their startups, emphasizing the importance of alignment between the two parties.

• Personal compatibility is crucial when choosing an investor, likened to marriage.
• Seek investors who can provide help in areas where the founder lacks experience.
• Technical founders may benefit from investors with commercial experience or connections.

Certainly there is a level of personal compatibility that needs to be there. Once an investor has invested in your company, you can't get rid of them. You're really committed. It's almost like getting married.

This quote emphasizes the importance of compatibility between investors and founders due to the long-term commitment involved.

So, for example, let's say you're a technical co-founder... but you've never run revenue before... You probably want to look for an investor who either has operating experience in that space, a commercial operating experience, or who knows people who could act as your advisor and potential hire to help shore up that part of your company.

This quote suggests that founders should seek investors who can fill gaps in their own expertise, particularly in areas crucial for company growth like revenue management.

• Non-technical co-founders are not inherently a red flag for investors.
• Preference for technical co-founders is due to the focus on unique technologies.
• Ideal founding teams include both strong technical and commercial co-founders.

Okay, well, in a general sense, I do not believe non-technical co-founders are a big red flag at all... It's just when it comes to XC's investment focus. We have a preference for companies that are built on unique technologies...

This quote clarifies that while non-technical founders are not a problem, the speaker's firm prefers to invest in technology-driven companies.

But the best founding teams actually are teams that bring together a very strong technical co-founder, as well as a very strong and experienced non-technical commercial co-founder.

The quote highlights the ideal balance in a founding team, combining technical innovation with commercial acumen.

• Owning technology is preferred for investment to ensure a technical advantage.
• Outsourcing is acceptable for early prototypes to test product-market fit.
• Dependence on outsourcing should be limited for long-term success.

In our specific case, we would prefer the company to own the technology because we believe we invest in companies that have a technical advantage.

The quote expresses a preference for in-house technology development to maintain a competitive edge.

But if the way they've leveraged outsourcing is to build an early prototype, to figure out if they have product market fit before they spend serious engineering time to build out a full-blown product, that's okay.

This quote acknowledges the practical use of outsourcing for initial testing before committing significant resources to product development.

• A product roadmap is critical for navigating a dynamic competitive landscape.
• Vision and adaptability are key in developing and adjusting the product roadmap.
• Founders must anticipate future developments beyond the initial product.

I think [having a product roadmap] is critical because in the technology space, your competitive landscape is extremely dynamic.

The quote stresses the importance of a product roadmap in staying competitive in the fast-paced technology sector.

We believe you need to go in with a vision, with a very strong vision about how the world eventually is going to be different and better because of you.

This quote underlines the necessity of a clear vision for the future when creating a product roadmap.

• Pivoting should be based on strong signals and traction from side aspects of the business.
• Random pivoting without clear direction is less likely to succeed.
• Founders should be observant and responsive to unexpected growth areas.

The best pivots I've seen are the ones where the founders have noticed that something on the side, outside of their core business, is actually thriving... and they start testing that out to see if the signals are real.

This quote explains that successful pivots often come from recognizing and capitalizing on unexpected areas of growth.

The worst pivots are the ones where the team has come to run into a wall in the core product... so they start testing randomly, and those pivots rarely pan out.

The quote warns against pivoting without direction, which often leads to failure due to a lack of focus and limited resources.

• When facing unexpected challenges, it is crucial to review and scrutinize the underlying assumptions of a business model.
• Assumptions should be tested for their validity through experiments with customers or users.
• The process aims to validate or invalidate these foundational assumptions to inform subsequent actions.

"One or more of those key assumptions have not been proven out, and that's why things are not going well. So go back to those key assumptions and really ask yourself, are they true?"

This quote emphasizes the importance of critically evaluating the assumptions that a business model is built upon, especially when the business is not performing as expected.

• Great VCs come from diverse backgrounds and do not require specific life experiences.
• They excel at evaluating entrepreneurs, focusing on perseverance, conviction, and adaptability.
• VCs are likened to talent scouts, searching for entrepreneurs who will become the future stars of the industry.
• Successful VCs understand the right timing for holding or selling investments, recognizing the potential for substantial returns.

"Being a VC is like a talent scout. The entrepreneurs are the stars are the talent that you're looking for, you are the scout, you are acting in the background."

The quote draws an analogy between VCs and talent scouts, highlighting the VC's role in identifying and supporting entrepreneurs who have the potential to succeed on a large scale.

"And the greatest vcs know to identify which companies still have a lot of potential and hang on to their ownership in the company despite having made 20 x, 30 x or 50 x in the investment, because they know that this could be 1000 x return."

This quote underscores the foresight and discipline required by VCs to hold onto investments with high growth potential, resisting the temptation to sell early for a quick profit.

• Long haul transportation is ripe for disruption due to existing inefficiencies.
• The industry has not been deeply penetrated by technology yet.
• The convergence of connected devices and mobile technology presents a timely opportunity for innovation.

"And why long haul transportation? Because there are a lot of inefficiencies. Technology hasn't really deeply penetrated that industry."

The quote identifies long haul transportation as a sector that has not fully embraced technological advancements, making it a target for disruption due to its inefficiencies.

• Seed stage funding is described as highly competitive and challenging.

"It is hyper competitive and challenging."

This brief quote captures the current competitive landscape of seed stage funding, indicating a tough environment for startups seeking initial investments.

• The Apple Watch is considered a success based on user testimonials.
• It has positively impacted users, such as a realtor who found it improved client interactions and reduced phone dependency.

"I recently spoke with a realtor who has just bought an Apple Watch, and she was singing his praises of how he's changed her life and making her less dependent on her phone and leading to much better client interactions."

This quote provides anecdotal evidence of the Apple Watch's success from the perspective of a user who experienced practical benefits in their professional life.

• A recent investment was made in a stealth mode fintech company in the personal credit space.
• The decision was influenced by the founders' suitability for the problem space and their complementary skill sets.

"So we recently invested in a fintech company in the personal credit space. The entrepreneurs, the perfect entrepreneurs for this problem space, and the two co-founders are very complementary of each other, covering both the product side and business side of the venture."

The quote explains the rationale behind a recent investment, highlighting the importance of the entrepreneurs' fit for the industry and the synergistic partnership between the co-founders.

• The host, Harry Stubbings, concludes the interview and offers listeners a chance to win a Steve Jobs book.
• Show notes and additional resources are available on the podcast's blog.
• The host endorses Hiring Screen for recruitment, sharing a personal success story.

"Now, if you enjoyed today's interview with Alan, don't forget to win your Steve Jobs book by leaving your review on iTunes and then sending the name that you left the review under to Harry at the twentyminutevc.com."

This quote provides listeners with an incentive to engage with the podcast by offering a reward for leaving a review, demonstrating a promotional strategy to increase listener interaction.

"And finally, if you're thinking recruitment, think hiring screen, I used them to find my brilliant assistant Jackie, and I simply couldn't have done it without them."

The quote offers a personal endorsement for a recruitment service, suggesting its effectiveness based on the host's experience.