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. 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 just to give you a sense of what I've always been People typically ask me to give you an idea so My Brief Background I started business adventures in 2017. We are fund one is $137 million fund. It's one of the largest seed venture funds, definitely the largest by women, at least in 2017. Our sweet spot is writing one to $3 million checks in C stage companies. We selectively do Series A. We've done anything between 50k to 6 million as a range of our check size. We have a focus on enterprise SaaS. I think most of the founders here today are probably enterprise SaaS founders and which is our primary focus. We do have a preference for AI future work machine learning 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 a autonomous welding robot Data Grill, which is a privacy GDPR compliance company which actually Datagrow just announced their Series B founding lab releases this morning. So hopefully that gives you a flavor of the type of deals we do. Anything from dev tools, open source platforms to autonomous machines to enterprise SaaS offer workflow automation companies. That's a brief background on the funds basis Adventures 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 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 engagement manager at McKinsey, spent time in New York and also a year in Shanghai and also startup Founder before that and got a PhD in psychology and mastering statistics. Finally and probably the most importantly I have two kids under six and juggling two young kids while raising a fund 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 and happy to also chat about work life. 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 now. So that's one of the interesting topics that Happy to chat about. So that's my brief background. I have some example questions and feel free to this is to get things started and flowing. Feel free to ask any of these questions or different questions 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 skill? Why do VC say it's too early or not venture skill? The market's too small, so how does the math actually work for VC funds? Why do I get these reactions? 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 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 raising $5 million seed stage rounds without having even a product. 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. Have you talked about and then metrics? Metrics is one of the most commonly asked question what are VCs looking for when they're evaluating my startups? What kind of metrics? How much revenue do I need to have? How fast do I need to grow? What are some of the things people so that's actually a trick question which I'm happy to talk about, but 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 rounds? Sometimes I get founders coming and say, hey, our run is over. Subscribed to try to generate a little bit of momentum. But that can also sometimes work really well. Sometimes it end 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 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 diluted. If you look at the public company, a 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 theses about my potential acquisition opportunities? So these are all the questions and just to get you 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, so I'm happy to answer any of those just to get the question flowing. What I'll do actually is, you know, 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, we can be fairly casual, you know, feel free to pop in when you have anything and happy to switch gears or anything gets more interesting or less so, happy to switch gear. So to get things started. The VC math. I'm sure you've read posts somewhere on the website where VCs 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 $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 my fund the size of 140, 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 of my funds, that's pretty small. And that's not enough for me to even return half of the fund. So in order for this company specific to return the capital, I either have to own so much more, maybe 20% to start with or have much more fall on capital just so that I don't get diluted as much, I still keep my 10% or the company will have to worth a lot more than billion. It could probably need to be worth like 2 or 3 or 5 billion for this to be a home run for us. So that's why the math is so hard. And everyone knows for each of the VC funds, most likely you probably only have a few hits. If you're lucky, 1 to 3 is probably common. If you hit one that's already pretty hard, the chances of hitting one. Unicorn is already a rare event. So VCs are very incentivized to own as much as possible to make the outcome as big as possible in order to return a fund. And that's a VC math. It's pretty straightforward. That's why VC are looking for unicorn versus I call it reindeers. If your company's worth 20 million 300 million, I think they're a fantastic company. Might not just be venture skill. So that's the VC math. Does that make sense? Cool. Thank you.

Can I ask you a question really quick? 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 a hundred million dollar valuation like pre 1 million, sometimes even pre like company inception. So how are things change 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 basically doubled and everyone's getting preempted. Right. 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 company become 1 billion, that's like a really rare event. If you think about like 20 years ago they're only like a handful of company worth that much. Today there are hundreds of companies. 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 use F4D or E valuation all higher, which means that seed, we can afford to pay a little bit more to justify that multiple later so 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 and we're not in the deal. Then we don't have a return that's even worse outcome to follow up.

Has the series A now become the new seed or vice versa? And do you think that will continue? 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 rounds each move up. So C becomes A become B. We do see that happening at the same time though. There's also a clear gap between certain size. So we're seeing a lot of like $13 million rounds or $14 million rounds. It was like a B before, but now that's A. And then you're seeing a lot of like two, three million dollars steep. So there's a gap in between. Now find me another round. Is this seed or is it A? It's actually harder for, for 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 two. 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. 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 the premium companies. All the money is raising to those, those are just insane valuations. So expensive. At the same time, their vast majority still can't raise. So keep that in mind. Even though that happened to some companies in the market, it might not necessarily happen to actually it doesn't happen to everyone. So 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, 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 coder. You can probably even get rid of. You can probably get rid of your employees much more easily, even the co founders. But VCs will just end up on your cap table. 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 partner are important. If you depends on your round dynamics, you have like one lead partner and 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 a specialized fund 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 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 leaning measure 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 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 interest. Investor interest. 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 the US investor because US market, 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. Let's see. Oh wow, there's a lot of questions. Now we do larger enterprise sales with annual SaaS. Lessons. How do I calculate the metrics like Churn or LTV in the first year? We haven't lost a customer yet. Yeah, so this is where it gets really interesting. When investors are looking at early stage startup, they're asking for a lot of metrics. What is your Churn? You've been around for one year, they've been 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. It's 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 quotes, you know, you have five 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 early stage. And if your turn is if no churn, you just say 100%. But understanding motivation of VCs and why they're asking these questions is super important because then you can direct them to the right kind of right direction. Which brings me one of the point 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 ar. It could be soft metrics such as the team that has done this before. Initial, strong user, love, tell a great story, 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 five to seven years. And these supporting evidence, they're looking for Churn, they're looking for a tv, you don't have it. Find something, ask good or 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've been 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 digging a little bit more also happy to talk about this a little bit more. If we have time we can come back to this specific point. It's very important. A lot of people ask the same question. A lot of people think we have to hit a million AR to be able to raise aa. While traction is important, you don't have to do that. There are many, many ways to to tell a really great story, race a really strong round without having to have the really hard metrics. Especially if your sales cycle might be a year or two years. It's just impossible in a short time frame to close that much money. We can talk more about that. 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 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, the core difference is 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 the legal and tax implication is such that if you're company dredgers in New Zealand, we might need to our LPs, limited partners and investor in our funds might need to pay taxes in New Zealand and nobody wants to do that. It's just like extra burden and headache. Right. So if you incorporate in a way that makes this 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 the startup which VC take into consideration. For example, if you're based in New Zealand, if you're just targeting New Zealand as a market, that's not very interesting for VCs because the market is much smaller. If you're based in New Zealand but targeted US market I think US VCs would be much more interested in that. For example, Canva is a startup based in Australia. They're one of. They're pretty strong. Even the US market, those examples, I think through your target market, 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 basing other geographies, it could be New Zealand, Australia, Eastern 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. So very expensive. The cost of talent is much higher than other GEOs. So if you have equally good talents that cost half of how much it costs here, use it as advantage. Build products faster, 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 you can be a billionaire company, you can be a unicorn. 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. Or 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. Hopefully that answers your question. I want to 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 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 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 VCs who just don't invest in your market, VCs who don't invest in certain GEOs or hurt 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 deal fell at the final stages. And so understanding how to run this process 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 at 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 of 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 enterprise sales process. There are a lot of subjective aspects to it. Understanding how to close deals and how to interact with the customers 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, 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. The final question I want to touch on is what happens if we get ghosted? People get ghosted all the time. Founders 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. Like while everyone tried to reply every email. Just impossible to do that. Right. So don't take personally, disqualify the lead and move on with VC who don't go see you. Simple as that. So, yeah, I'll live like that. It's been a pleasant. It's been a pleasure talking to everyone. Everyone have more questions. Want to reach out my email just line at Basis Ventures. Thank you.

Thank you, Lon. And thank you everyone for joining us. I hope you take part in more sessions today with Sester Build.