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06.28.18 - Advise from a seasoned venture capitalist

With an uneven economic recovery and new administration in Washington, Interface magazine asks veteran venture capitalist Randy Lunn to take stock of his industry. A member of CALIT2’s TechPortal Oversight Committee, Lunn has 40 years of experience. As managing director of Catalina Ventures, Lunn consistently finds, finances and supports creative entrepreneurs who grow businesses that become leaders in their fields. Over the years, he has raised and managed over $1 billion in funds for start-up and early-stage technology and life science companies. With his partners, he has completed approximately 250 deals; resulting in 44 IPOs and around 160 mergers and acquisition events.  

Q:  You’ve been known to find and support companies that are still in their concept stage, what motivates you to take the risk and invest in them?

A:  I got into the business by being one of two founders of Texaco’s venture capital subsidiary. My educational training is two engineering degrees and an MBA with an emphasis on finance. I have always loved technology, new markets, new products and the company building process. Building value and growing a new company while guiding and financing talented individuals has been my life-long passion. This is why I do not retire.

Q:  What are some of the main criteria you look for when deciding to invest in a startup?

A:  Growing a new company brick-by-brick is not an easy task, so you need to do your homework to maximize the chances for success. In broad terms, I use my four M process to screen deals. I look at a company’s market, management, margins and momentum. I want to see a large existing or potential market. Management needs to have had direct experience in the field they want to pursue. The product initially must be able to carry large margins to support growth and finance additional research and development. Finally, a new company must be able to generate early adoption and sales momentum. Is the customer willing to try and buy the new product? Is there an existing problem that must be overcome? Can the new product integrate well into the customer’s workflow and strategic objectives?

During my due diligence, I do not look for reasons to kill a deal. I focus on identifying all the relevant risks. What are the key elements that must be overcome to be successful? Then I outline a plan that will allow the new company to manage these risks over time. What are the resources and people needed? How can I add value? Then I make a decision as to whether I want to invest.

Over time, a company shifts from being technology centric to being customer centric. Technology leads lessen or even evaporate over time, but market share and customer relationships can be defended. Helping a company anticipate this transition helps keep them focused on customer needs and how to sell more to them.

Q: For you, what has been the most rewarding aspect of financing early stage companies?

A: The most rewarding aspect of venture capital is seeing a vision come true and seeing people succeed. I get a big thrill when a first-time team of entrepreneurs buy their first fancy cars, wonderful new homes and sign up for the boards of local charities. The biggest lesson in venture capital is that the world is not a zero-sum game. New value and wealth are created.  We have made the world a better place and given more choices to people.
Q:  What should startups think about before contacting a VC?

A: Before an entrepreneur approaches a venture capitalist, he or she needs to do some research. How much capital do they need and what type of venture capitalist do they want? One of the ironies of the venture capital business is that the very best venture funds manage too much money to make many start-up investments. Multibillion dollar funds must get their capital to work in big chunks. A VC partner can only sit on six to eight boards at a time. He cannot use up many slots on start-ups that also take more of his time than later-stage deals.

Look not only at the VC firm but also the individual partner you would like to work with. You do not always have the ability to pick a partner, but try to get a sense of who has the skills and contacts that will most help you.

There are a growing number of small and medium-sized funds, so be sure to meet their minimum requirements or be quickly growing into these metrics before approaching them. An introduction is helpful if you can get one.

Q:  What is the value of a pre-incubator like TechPortal to a startup company?

A:  An incubator is a perfect way to learn from experienced people how to grow your company. A team of advisers can help you set objectives, recruit key team members, make potential customer/strategic partner introductions and guide you in the capital raising process. The value can be amazing but do not expect miracles. You still have to manage and grow the business. It is hard work but fun work

Q:  What industries are hot right now, catching the eye of investors?

A: There are always hot new markets but by the time a new market is hot, there are usually many competitors.

Currently the internet of things (IoT) market is getting lots of play. This space is the next phase of connecting everything to the internet. The IoT market provides many entry points from semiconductors to IoT enabled products to IoT monitoring software with AI interfaces to send alerts or provide feedback.

The home segment is clearly in front of us with Amazon’s Alexa and numerous competitors, but the industrial markets will also offer large and significant returns. Think IQ is a clear leader in this space and is a leading company in the UCI Cove Fund. Think IQ has already saved its first major customer over $20 million by monitoring one of its major supply chains.

Another growth area over the last decade has been connecting people. This trend will continue. We will see more consumer apps and games. We will see if the current leaders like Facebook can morph with the evolving market. Will new leaders emerge? How the internet affects people is one of the most important topics in society today. We are still struggling to figure how it can help us and not divert us.

There is also a revolution going on in condensed-matter physics and chemistry with new materials. The quantum world is being exploited with products such as quantum dots that are already finding their way into TV sets and displays. Superfluidity, superconductivity, new catalysts, attosecond chemistry, quantum computers, spintronics, quantum Hall effect devices, topological insulators and other science breakthroughs are slowly but surely coming.

I believe that new 2D materials such as graphene will revolutionize many markets from faster, smaller and more linear semiconductors to new properties for sports equipment, industrial components and even clothes. Other 2D materials that will be coming soon including transition metal dichalcogenides, HexBN and more.

In the medical markets, we will see new approaches to antibiotics and drugs for cancer and autoimmune diseases. CRISPR and Cas technologies for gene editing are just appearing. We will see epigenetics capabilities emerge in the methylation, histone modification and micro-RNA areas. The understanding of the human biome will lead to effective methods to balance out the gut and protect it from attack. We will learn to live better with the diseases we have and possibly cure them.

Q:  Since you became a venture capitalist, what has been your biggest mistake/regret and lesson learned?

A:   The biggest lessons are (1) getting a great team as soon as possible, (2) focusing on what is truly important by performing the critical tasks first and (3) investing your cash wisely to live as long as possible if setbacks arise …. and they will.

My greatest regret is not acting sooner in addressing issues. A sense of urgency is the most important quality for an entrepreneur and venture capitalist to have.

Q: Firms in California, Massachusetts and New York account for 83 percent of the country’s venture capital, going forward do you see our home state continuing to be golden?

A: Southern California is clearly on the rise and an exciting place to be. California, New York and Massachusetts will remain the centers of entrepreneurship because the complex infrastructures exist and the leading academic institutions are there. Several secondary markets will remain important including Texas, Minneapolis, Seattle, Salt Lake City and others.

Q:  What is the biggest hype at this moment in your view and why?

A:  Bitcoin. The use of bitcoins in normal economic transactions is emerging but concerns remain. What the world wants is a stable store of value, but the bitcoin market is currently a speculators dream (or nightmare). There is no intrinsic value to them other than the energy burned creating them. An economist would value a bitcoin at the marginal cost to produce one. This is why many bitcoin miners have established themselves in locations where they have cheap hydroelectric power like Iceland and the Pacific Northwest. Today, the amount of bitcoins you can earn using a home PC would be dwarfed by the electricity bill.

The underlying technology however is of great value. The distributed general ledger technology and other competing solutions such as Hashgraph and Hyperledger Fabric are going to happen.  Most of the major financial institutions have experimented with distributed ledger technology and focused on three major concerns: technical (low transactions per second, and cost), regulatory (FATCA compliance) and security. One area that will hugely benefit from distributed ledger solutions is healthcare. Electronic medical records could be the first big win for the technology.

The Bitcoin world will evolve and several successes will emerge, but it will be a bumpy ride.

Q: Any closing thoughts?

A: It has been a pleasure to be a venture capitalist. I have enjoyed all of its components and the many people I have gotten to know. I believe entrepreneurship fueled by venture capital will continue to be the engine that drives jobs, new products, new markets and national wealth.  

Thank you for the opportunity to share some of my experiences.  

- Lori Brandt