AMA with Basis Set Ventures Founding and Managing Partner Dr. Lan Xuezhao

Thank you so much. It's great to meet everyone wherever you are. Good morning, good evening, good afternoon. So I will start by introducing myself, and I have a couple of example questions that might be interesting, and I'll share some tips, and feel free to ask me anything in the process, but this is just to give you a sense of what I've always been— what people typically ask me, to give you an idea. So my brief background, I started Basis Adventures in 2017. We are— Fund 1 is $137 million fund. It's one of the largest seed venture funds, definitely the largest by women, at least, you know, in 2017. Our sweet spot is writing $1 to $3 million checks Uh, in C-stage companies, we selectively do Series A. Uh, we've done anything, uh, between $50K to $6 million as a range of our check size. We have a focus on, uh, enterprise SaaS. I think most of the founders here today are probably enterprise SaaS founders, and which is, uh, our primary focus. Uh, we do have a preference for AI, future work, machine learning, uh, type of companies. So we're seed stage investors in companies like Rasa, which is open source developer tool for conversational AI, Path Robotics, which is an autonomous welding robot, DataGrowth, which is a privacy GDPR-compliant company, which actually DataGrowth just announced their Series B funding led by Felicis this morning. So hopefully that gives you a flavor of the type of deals we do, you know, anything from dev tools from open source platforms to autonomous machines to enterprise SaaS software workflow automation companies. That's a brief background on the fund, Basis Ventures. And before that, I was an early employee at Dropbox and led the corporate development strategy team there. During my time there, the company grew from just a few hundred million in revenue to almost a billion. Dropbox was such a great platform and good time for me to be part of because we grew up with the generation of enterprise SaaS founders, especially the bottom-up adoption product-driven companies, which is super exciting. We're also the most acquisitive private tech company at the time. So if anyone have questions on acquisitions and how to think through that, I'm happy to talk about it. Previously, I was an engagement manager at McKinsey. I spent time in New York and also a year in Shanghai. And I was a startup founder before that and got a PhD in psychology and a master's in statistics. Finally, and probably the most importantly, I have two kids under 6, and, you know, juggling two young kids while raising funds and doing investments and doing everything has been the most rewarding, at the same time challenging aspect of life. And if anyone's interested in talking about this, I'm happy to also chat about work-life. I wouldn't— I don't call it work-life balance because it's like no balance. I call it a work-life integration. Now, when everyone's at home and on Zoom, it's more integrated than ever. So that's, you know, one of the interesting topics that happy to chat about. So that's my brief background. I have some example questions, and, you know, feel free to, you know, I just— this is to get things started and flowing. Feel free to, you know, ask any of these questions or different questions anytime, anytime you wish in the chat function or anywhere. So these are some of the really common questions that often get asked. One of the first one is, Is my business venture scale? Why do VCs say it's too early, you know, we're not venture scale, the market is too small. So how does the math actually work for VC funds? Why do I get these like reactions, right? That's one of the most common questions I get asked all the time. Another one would be, how do I raise the first round of venture capital How to get introductions to VCs? How does cold intros work? If I can't find a warm intro, where do I find a cold intro? Can I just email the VC and get a response to that? I also actually got a lot of cold calling sometimes, which is— you know, can talk about as well, and what to do and what not to do. Other lines of questions: What are VCs looking for in a founder? Why can some founders raise without anything versus others can't? Especially these days, you're hearing people, you know, raising $5 million seed stage around without having even a product, right? There are more and more stories these days about these rounds and how should we think about it? How should anyone think about that? How can my company be like that? So that's another set of questions I have you talk about. And then metrics. Metrics is one of the most commonly asked questions. What are VCs looking for when they're evaluating my startups? What kind of metrics? How much revenue do I need to have? How much, how fast do I need to grow? What are some of the, you know, things people— So that's actually a trick question, which I'm happy to talk about, but like get asked almost all the time by founders who are thinking about their next round of financing or thinking about planning ahead for different rounds. Similarly, in kind of on the same line, how do I gain traction or momentum from VCs? How do I create a competitive or oversubscribed round? Sometimes I get founders coming and say, hey, our round is oversubscribed, to try to generate a little bit momentum, but that can also— sometimes works really well, sometimes it ends up hurting you. What's kind of fine line between that? How do I pick the right partners? Who are the partners I should be going for? How do I think through funds versus specific partner? Which ones are more important? And then how many rounds do I have to raise before going IPO? How should I think about founder dilution and control? There are companies who don't really— who are super dilute. If you look at the public company CEO stock percentage, it's very, very different. You have anything from like, you know, probably 50% to like 5%, right? So a huge range. How should founders think about dilution, especially at early stage? And finally, how do we think about getting acquired? Should I pitch VCs about my potential acquisition opportunities? So these are all the questions, and just to get you to think about some of the things maybe you should think about as an early-stage founder while building a large business, if you're interested in raising venture capital funding. And obviously there are way more questions that can be asked. And so I'm happy to answer any of those just to get the question flowing. So what I'll do actually is, I'll get things started because there's kind of a certain flow I put behind the questions. I'll get these questions kind of started and share some tips, and we can be fairly casual. Feel free to pop in when you have anything and happy to switch gears where anything gets more interesting or less so, happy to switch gear. To get things started, the VC math. I'm sure you've read posts somewhere on the website where VC's written about the economics of a VC fund and why VCs would need to shoot for a billion-dollar exit versus if you become a company that's worth $500 million, for example, or even like $200 million, Oftentimes it's a great outcome for founders, but the math still doesn't work for VCs. Why is that? Because it's actually pretty simple. For a fund, you know, my fund, the size of 140, right? If you do the math, if I invest in a company, I own 10% of that when I wrote the first check. And then down the road, I get diluted. I need more money to put in the company. If I don't, very likely at exit, when a company becomes a billion-dollar company and I own 5%, it means I only get $50 million back. So $50 million comparing with $137 billion of my funds, that's pretty small. And that's not enough for me to even return half of the funds. So in order for this company specific to return the capital, I either have to own so much more, maybe 20 percent to start with, or have much more following capital just so that I don't get diluted as much. Uh, I still keep my 10%, or the company will have to worth a lot more than a billion. It could probably need to be worth like $2 or $3 or $5 billion for this to be a home run for us. That's, um, so that's why, uh, that's why the math is so hard. And, uh, everyone knows for each of the VC funds most likely probably only have like a few hits, if you're lucky. Uh, you know, uh, 1 to 3 is probably like common. If you hit one, that's already pretty hard. So the chances of, um, the chances of, uh, uh, you know, hitting one unicorn is already a rare event. So VCs are very incentivized to, uh, to own as much as possible, to make the outcome as big as possible, in order to return the funds. And that's the VC math. It's pretty straightforward. That's why VCs are looking for unicorn versus, you know, I call it reindeers. If your company's worth $20 million, $30 million, I think they're fantastic company. Might not just be venture scale. So that's the VC math. Does that make sense? Cool, thank you. Which is like, so—

Can I ask you a question? Really good, since you said you want this to be casual. I think by standard terms, like if we're talking like regular times, like I agree with your math and justification, but right now the market's a little crazy. Like you're seeing companies literally get $100 million valuation, like pre-$1 million, sometimes even pre like company inception. So how are things changed in the current moment? Like, how does that, I guess what I'm trying to ask is like, How has the overall landscape impacted your world and how you think about it? Does that change anything or not really?

Yeah, it's really interesting. The current environment is crazy. I think $100 million, the price of a Series A, or, you know, basically doubled and like, you know, everyone's getting preempted, right? So, but the math doesn't change. We still need the math to work, which makes it, I think a couple of things. One, The exit value of the companies are substantially larger than before. Before, if you, you know, a company become $1 billion, that's like a really rare event. If you think about like 20 years ago, there are only like a handful of companies worth that much. Today, there are probably hundreds of companies, you know, unicorns are even bigger, right? So the outcome of the companies are getting larger, opportunity, market size are getting larger for especially enterprise SaaS companies, which means companies can sustain probably just higher valuation. If IPO value is higher, which means your F or D or E valuation is all higher, which means that seed, we can afford to pay a little bit more to justify that multiple later, right? So that we can make that math work, which is why we have to play that game. We don't play that game, then we lose on the deals, then we're not in the deal, then we don't have a return, right? That's, you know, kind of even worse outcome.

So to follow up, has the Series A now become the new seed or vice versa? And do you think that will continue? Like, do you think there's truth behind that? And how long do you think this will last for?

I think it's really interesting. All the large funds are just becoming larger and larger. And when they do that, they just write larger and larger checks and look for more and more traction. So when that happens, naturally the fund, the round should move up, right? So C becomes A, A becomes B. We do see that happening. At the same time, though, there's also a clear gap between certain sizes. So we're seeing a lot of like $13 million rounds or $14 million rounds. You know, it's— it was like a B before, but now that's A. And then you're seeing a lot of like $2, $3 million C. So there's a gap in between. Now, like, find me another round. Is this seed or is it A? It's actually harder for a founder to raise a decent-sized, you know, smaller-ish rounds, which is why you see a lot of extensions right now of, you know, $2 million seed, $2 million extension, extension number 2. They're like, you know, see that happening a lot before they get to that traction for a large fund to come in and give you a large check. It's very, very interesting market dynamics. The one other thing I want to mention is, even though we're hearing all these stories of founders being able to raise a very high valuation, at the same time, most founders can't raise. A lot of money is going to just what we call like the premium companies. You know, all the money's racing to those. Those are just insane valuation, it's so expensive. At the same time, the vast majority still can't raise. So keep that in mind. Even though that happened to some companies, and, you know, people, founders in the market, it might not necessarily happen to, actually, it doesn't happen to everyone. So, you know, setting a realistic goal to see whether you fit the VC pattern or not, and can actually demand the price and price, that's very important for founders to gauge how you should run the process and how much time you should spend on this, right? If that makes sense. So there's a question from Andreas. You mentioned a startup VC fit. How important is picking the right funds? As a seed stage AI startup in the future workspace, we are the pro— what are the pros and cons of picking a dedicated Future Work Fund. What about location? Do you go for US VCs at Series A if that's where your largest market is? Great question. I would say it's so important to pick the right partner, because you think about it, you can never get rid of your VC partner. They are equity holder. You can probably even get rid of— you can probably get rid of your employees much more easily, and even the co-founders, but VCs will just end up on your or captive, it depends on the control. You may or may not be able to divorce the VC, right? So if you don't think this is productive relationship, it's incredibly important to pick the right partner and the right partner for the next 10 years. That's, you know, start by saying that. At the same time, not all the VC partners are important. If you, depends on your round dynamics. You have like one lead partner, a lot of smaller checks versus like multiple, you know, partners participating kind of in the same round. Dynamics will be a little bit different. So I would say the lead partner is probably the most important. The person on your board is the most important. You want to make sure you pick the right person for sure. So how important it is to pick specialized funds versus generalized funds, right? If you have the option, I would really evaluate whether there's a way to kind of have a complementary set of investors working together. So my— if I were a founder, I prefer probably one lead investor, but another investor who's just as important with smaller stake, but can complement this leading investor fairly well. So you get more help versus one person, right? If you had the luxury of doing that, I would pick a specialized fund and a generalized fund. So then you get the two can work together. But if you can only pick one at C stage, I think that boils down to the partner. Who do you have the best chemistry with? Who do you think will be the most helpful to you? Where do you need the most help? Can this person help you? So I think it's less important if it's specialized versus generalized fund. It's more who's your best soulmate, you know, spouse in the startup world who can support you for the next 10 years, if that makes sense. If your market is primarily US, I would definitely go with a US investor. If your market is primarily European, go with a European investor, because being local is very helpful with customer intros, investor intros, all the different introductions. With the exception of a European startup wanting to target US market but based in Europe, I would still go with a US investor, because US market, a lot of— we actually have a startup based in Europe but came to the US. Because the market is just so much bigger, and it will help them land here and open up office and introduce a bunch of investors, and among other things. So think about the long-term market versus your near-term market and pick the investor who can best help you get there. So hopefully that answers your question. Um, let's see. Oh wow, there's a lot of questions now. Um, we do larger enterprise sales with annual SaaS licenses. How do I calculate the metrics like churn or LTV in the first year? We have— we haven't lost a customer yet. Yeah, so, uh, this is where, this is where it gets really, um, interesting. When investors are looking at early-stage startup, you know, they're asking for a lot of metrics. What is your churn? You've been around for one year, uh, they'll be asking for churn, LTV. These metrics, I would say, don't really matter in the first year because you don't have them. Really understands what investors are looking for is more important. So the reason they ask for churn LTV is, you know, they want to understand whether customers have tendency to churn, whether they will leave you, and whether the business is sticky, right? If you can give them any indication of that, or just, you know, a customer quote, you know, you have 5 customers, all of them are upscaling, buying more, and no one is interested in churning. So I think that's as good as having metrics, at least at an early stage. And if your churn is, you know, if no churn, you just say 100%. But, you know, understanding motivation of VCs and why they're asking these questions is, is super important because then you can direct them to the right kind of, uh, right direction. Which brings me one of the points I wanted to make earlier is, you know, actually here VC look for signals, right, to validate you can be a unicorn. These signals don't need to be hard metrics in terms of ARR. It could be soft metrics such as the team that has done this before, initial strong user love, tell a great story and support it with evidence. So it is really important to tell a story that will support your narrative and paint this picture to convince VC that you will be a great unicorn founder down the road in 5 to 7 years. And these supporting evidence, they're looking for churn, they're looking for RTA, you don't have it, you know, find something as good or like give them an indication so in their mind they can connect the dots from their side and still kind of say, oh yes, you're You're a great company, these are some initial evidence. Because you're being around for a year, you're very young, it's unreasonable to ask you to even have these metrics. Hopefully that makes sense, have you dig in a little bit more. Also happy to talk about this a little bit more. This is, you know, if we have time, we can come back to this specific point. It's very important, a lot of people ask the same question. Like a lot of people think we have to hit a million AR to be able to raise A. While traction is important, you don't have to do that. There are many, many ways to, to tell a really great story, raise a really strong round without having to have the really hard metrics, especially if your sales cycle might be a year or 2 years. You know, like, it's just impossible in a short time frame to close that much money. And, you know, we can talk more about that. Okay, so the next question: Are US VCs likely to invest in non-US companies? I'm a female founder of an AI company based in New Zealand, and I'm debating if I should consider approaching people or continue with the bootstrap journey. There are plenty of VCs investing in non-US companies. We've done a bunch, actually. We just invested in a company in Australia a couple quarters ago, and we're closing— actually just closed another company based in India. So a lot of VCs also do that. The core difference is, uh, it's less where you're physically based, it's more legal-wise where you're incorporated, right? So we like companies, wherever they're based, incorporating Delaware because, uh, the legal and tax, um, implication is, uh, is such that if your company directors in New Zealand, we might need to our LPs, limited partners, and investors in our funds might need to pay taxes in New Zealand, and nobody wants to do that. It's just like extra burden and, uh, you know, headache, right? So if you incorporate in a way that makes it super easy for VCs to invest in your company, I think people care a lot less about where you're actually based. The other point I want to bring up is where you're based having implication, positive and negative, on, uh, on the startup, which we should take into consideration. For example, if you're based in New Zealand, um, if you're just targeting New Zealand as a market, that's not very interesting, uh, for VCs because market is much smaller. If you're based in New Zealand but targeting the US market, I think US VCs will be much more interested in, in that. Like, for example, Canva is a startup based in Australia, They're one of, you know, they're pretty strong even in the US market, right? So those examples, I think through your target market, I think through the VC math versus where you're exactly physically based, that's pretty important when you try to tell the story to VCs. A separate point which you should use to your advantage is that if you're based in other geographies, it could be New Zealand, Australia, Eastern Europe, Europe, Asia, more likely you have better engineering resources that cost, you know, with much lower cost. So we're based in San Francisco. It's very expensive to live here. Even during COVID when cost has come down, it's still very expensive. The cost of talent is much higher than other geos. So if you have equally good talent that costs half of how much it costs here. Use it as an advantage. Build products faster, you know, show more traction. So when you start pitching VCs, you have a stronger story compared to some of the local companies. That's how you win, frankly. I think when VCs look at your company, they just care about whether it can be a billion-dollar company. You can be a unicorn, right? And If it doesn't make the math legal or tax more complex, I think people will be very happy investing in these markets. That said, there are VCs who don't invest in international markets. We're not one of them. We do invest wherever you can build a large business, because coverage issues, because of other reasons. So find the VCs who do that. It's pretty important. So hopefully that answers your question. I wanna come back to this one point that how to run a fundraising process. We talk a little bit about the oversubscribed rounds and how to generate some FOMO, how to kind of run a process that's more attractive to VCs and are able to help people wrap up soon. Running a VC process is basically like enterprise sales. Think about it as, you know, who are you selling to? What is your funnel conversion? How do you qualify leads? You have to qualify leads super aggressively because if you have unqualified leads, which, you know, VCs who just don't invest in your market, VCs who don't invest in, you know, certain geos or certain founders, types, then you're wasting your time, right? Work on closing, winning the deal. So pitching to a lead partner and winning them over, it's very, very different from pitching the full partner meeting and winning every— everyone over. A lot of the deals fail at the final stages. And so understanding how to run this process, and from generating leads funnel conversion, qualifying leads, and actually closing is really important. It's very crucial for founders to effectively close VCs and also, like, not spend a ton of time. The one thing that's super important is that sometimes if there's no momentum in your fundraising process, it's just very hard to to raise money, especially early stage, because there's not a ton of metrics to look at. If you don't have the traction, you don't have the momentum, it's very hard to generate momentum later if you already lost it initially. And that's something I think a lot of founders initially when they start fundraising, they don't know how to start generating a little bit momentum. And even though it's a perfectly good company, they just realize they can't raise. So keep that in mind. It's really like an enterprise sales process. There are a lot of subjective aspects to it, understanding how to close deals and how to interact with the customers, right, which are VCs, will help you save a ton of time and find the best partners in the process. So other questions I often get asked, you know, what's going to happen? I don't know how much time we have, actually. So if you want to answer one more and then we will close it up because we've actually hit it, but I just want to make sure that you can close out. Yeah, I'm sorry. Yeah, so yeah, the final question I want to touch on is what happens if we get ghosted, right? People get ghosted all the time. Founders are actually really annoyed when they get ghosted. I would say just don't take it personally. VCs get hundreds of emails every day. It's just really hard to reply to everything. While everyone tried to reply every email, just impossible to, to do that, right? So don't, don't take personally, disqualify the lead and move on with VC who don't go to you. As simple as that. So yeah, I'll leave it like that. It's been a pleasure talking to everyone. If everyone have more questions, want to reach out, my email just lan@basis.dollventures. Thank you. Thank you, Lan, and thank you everyone for joining us. I hope you take part in more sessions today with Saastr Build.