“Some of our best investments have come out of these periods of extreme stress in the markets.”
This first installment of the SALT Talks: Pandemic Venture Investment Series, presented in partnership with OurCrowd, includes a survey of general pandemic investment trends and disruptive approaches to funding start-ups from Jon Medved, CEO, OurCrowd; and a revealing interview with Steve Krausz, Managing Partner, U.S. Venture Partners, on key sectors, potential opportunities, and lessons learned from previous crises. Moderated by Alec Ellison, Chairman, OurCrowd U.S.
Having gone through multiple economic crises over several decades, Krausz sees an evolved investment landscape. We see more diverse investments that test the strength of companies in venture portfolios. “The difference here, and it's a dramatic difference, is that the venture community now is a very global community. It has a footprint that spans all of the continents.”
The pandemic has brought about a rapid acceleration in digital growth and integration. Companies and their management understand the need to transform their organizations to be more digitally-oriented, beyond just the needs created by an extended work-from-home period. “The digitization of the world economy is going to be enormous.”
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SPEAKERS
Steve Krausz
Managing Partner
US Venture Partners
Jon Medved
Chief Executive Officer
OurCrowd
EPISODE TRANSCRIPT
John Darsie: (00:12)
Hello, everyone, and welcome back to SALT Talks. My name is John Darsie, I'm the Managing Director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology, and public policy.
John Darsie: (00:26)
SALT Talks are a digital interview series that we launched during this work from home period, with leading investors, creators, and thinkers. What we're really trying to do during these SALT Talks is replicate the type of experience that we provide at our global conferences, The SALT Conference. What we're trying to do is provide a window into the minds of subject matter experts, as well as to provide a platform for what we think are big ideas that are shaping the future.
John Darsie: (00:51)
Today, we're thrilled to welcome you to the first episode of our Pandemic Venture Investment Series, which is being presented in partnership with OurCrowd, a leading global venture investment platform. In this series, we're bringing top entrepreneurs, investors, business leaders together for deep dives into the challenges and opportunities arising from the pandemic crisis. Today's episode, Investing in the Pandemic and the New Normal, features Steve Krausz, Managing Partner of US Venture Partners, and Alec Ellison, the Chairman of OurCrowd US, with an introduction by John Medved, the Chief Executive Officer of OurCrowd, who joined Anthony yesterday for a SALT Talk as well.
John Darsie: (01:33)
Just a reminder, if you have any questions during today's talk, you can enter them in the Q&A box at the bottom of your video screen. Now I'm going to turn it over to Jon Medved again, to provide a more detailed introduction into this series and today's talk.
Jonathan Medved: (01:46)
Thank you, John. It's great to be here with The SALT Talks. This is a very, I think, important beginning of a new series called the Pandemic Venture Investment Series. We are attempting here to cover a broad range of topics about the investment opportunities represented by the crisis that we're all living through. It's both focused on medical issues and ways that we can combat the pandemic directly, but also what we call the new normal. So there will be sessions in the coming weeks, once a week, about mobility, about artificial intelligence, about ag tech, and about a variety of other great topics. So please come back and see us.
Jonathan Medved: (02:33)
Just a few words of introduction about OurCrowd. OurCrowd is the world's largest venture investment platform. We're managing close to a billion and a half of commitments. We've made over 220 individual company portfolio investments, where you as an accredited investors can actually choose which one you would like to join us with. Each of these investments are curated by the OurCrowd investment team, we invest our own capital, and then we set terms, sit on boards, and open these investments to our crowd. We also offer at the moment, 22 different venture funds.
Jonathan Medved: (03:14)
Today we're proud to start off this series by featuring one of our investments in the spectacular fund known as US Venture Partners, out of Silicon Valley. We were fortunate enough to be a limited partner in US VP number 12, and we're welcoming today my good friend, full disclosure. We went to high school together, Steve Krausz who is general partner, managing partner at US VP. Steve has been there literally, since I think four years after the fund started, 1985. So about 35 years of venture experience. The fund, US VP has invested primarily in Silicon Valley, but also very, very strongly in Israel. They include in their portfolio, great companies such as Check Point, Box, GoPro, Mellanox, Trusteer, and [inaudible 00:04:14]. You can go on and on. It's a great team of people who we're close to.
Jonathan Medved: (04:18)
I also, another full disclosure, I think my first big venture capital investment almost 30 years ago was done together with them in a company called Compugen, which became a billion dollar company in bioinformatics. We're big fans of US Venture Partners.
Jonathan Medved: (04:36)
To interview Steve Krausz and to get his unique perspective, we're joined today by my partner and also very good friend, Alec Ellison. Alec is the Chairman of OurCrowd in the United States. He has a very rich, decades long background where he was the President of Broadview International. Broadview was perhaps in the day the leading investment bank focusing on technology companies. That's where I met him the first time. He traveled to Israel, did more transactions in Israel, frankly, than any local Israeli investment banker. Broadview was later acquired by Jefferies, where Alec then became the Vice Chairman and the head of their technology investment banking group. Today, as I mentioned, he is the US Chairman of OurCrowd, and a big part of our recent success.
Jonathan Medved: (05:28)
So I'm going to turn it over to you, Alec, to talk to my good friend Steve. I think the viewers are in for a treat today. Thank you.
Alec Ellison: (05:37)
Thanks very much, John and Steve, it's really a pleasure to be able to have this discussion with you this morning. Again, welcome to all of our participants.
Alec Ellison: (05:47)
So Steve, let's jump into it. We're approaching eight months into this pandemic. You've been around long enough, as John Says, to have lived through quite a few crises. Even before that, I guess crash of '87 was probably the first one you went through. What do you perceive as different about this crisis from the perspective of being a venture investor.
Steve Krausz: (06:09)
Well, thank you very much. I really appreciate the introduction and the kind words, Alec and John. The difference here, and it's a dramatic difference, is that the venture community now is a very global community. It has a footprint that spans all of the continents. At the time when I entered the venture industry, and it very much was a cottage industry then, you could probably fit all of the VC firms into one room. In '87, it was an industry that had a few tens of billions of dollars invested overall. What happened then and what happened again in 2000 and then again in 2008, were really a fundamental crisis of liquidity, in both our industry, as well as in the public markets.
Steve Krausz: (07:07)
So what is certainly different now is the industry spans all geographies, and it also has sources of capital that it didn't have in the past. It also has a group of individual that are highly diverse but what still remains true is that the crises like these really shake the industry to its core and prove to be a real test of the teams that we invest in.
Steve Krausz: (07:43)
What I would say is going to be different this time is that fundamentally, the structure of work and the structure of the kinds of industries, the supply chains, how people think about their investments in terms of the broad diversity, is going to be very, very different. In past crises, most of us burrowed down and tried to extend the life of the capital that we had invested, but we didn't change strategies dramatically. This time, I think the strategies are changing quite a bit.
Steve Krausz: (08:20)
But as you point out, some of our best investments have come out of these periods of extreme stress in the markets. As a matter of fact, one of my very first public companies, a search company called Verity, we invested in it just after the '87 crash. Then after the 2000 crash, we invested in [inaudible 00:08:46] and Guidewire, which became two public companies. During the 2000 and 2009 period, we invested in Trusteer and Box. So those were really opportunities coming out of those kinds of crises, but this one, this one will be different because of the importance of the venture capital [crosstalk 00:09:10].
Alec Ellison: (09:10)
So picking up some of the opportunities you had in the past. Largely, those were financial crises, crises of liquidity, as you said. We almost had a financial crisis here in March, which was very scary, very, very rapid. Seems to have been, at least for now, put on hold. Frankly, the recovering I think has surprised many, in terms of the public equity markets, but it feels like this time we're dealing with a shift with the economy. Much has been made of the acceleration, digital transformation. I think it was back six months ago, at end of April, [inaudible 00:09:47] said that we've seen two years of digital acceleration or digital transformation in two months. A quarter later he talked about technology resilience or technology transformation being the key to business resilience. It didn't have anything quite quotable on his earnings call earlier this week.
Alec Ellison: (10:07)
Do you think we've seen seven months or eights months, in the eight months, eight years of digital transformation or do you think it was more of a quick acceleration and now we're back on the old trajectory just a few years forward?
Steve Krausz: (10:24)
Well, I think what's changed is the attitude of company management about how quickly they have to make the transformation to a more digital footprint across the globe. So management teams are wrestling, and I was listening to the JP Morgan technology conference yesterday, where Jamie Dimon was talking about how his organization has thought about how many people have to come to the office, how it has to reach out its customers, what consumers are going to be doing differently, so that's a fundamental shift. I think though for the most part, at least to date, has been playing on trends other than the work from home that were already underway. That has to do with cloud, the transition to cloud, the transition to a digital economy, as far as financial services, the change in logistic systems, and some of the changes that were already starting to happen in healthcare. We can talk about that a little bit more later.
Steve Krausz: (11:35)
But I think that the impact of this transition, because venture and technology plays a much more important role across the globe, this time will be fundamentally different from past changes. The digitization of the world economy is going to be enormous.
Steve Krausz: (11:57)
Now, I think what remains yet to play out, quite frankly, and I don't think anyone appreciates this, is we were on a longterm path of improving economics for many people across the globe, bringing many people out of poverty, many people in the middle class in China and elsewhere in Asia, Africa was improving. I think we have seen a fundamental jolt to those economies, and I don't think yet we have a prediction of how that's going to play out. I think whatever trends we started will be accelerated, though, that I know.
Alec Ellison: (12:38)
I mean, what you're getting at is a lot of the so-called COVID casualties, hospitality, travel, some of these are very people-intensive types of businesses, these are in many cases whether it's in developed economies or developing economies, more able to lift up masses than the so-called pandemic plays, which tend to be highly knowledge intensive. Everything from Zoom that we're on now to Nvidia to the mega caps of Apple and others.
Alec Ellison: (13:11)
So as you think about your own portfolio, are you seeing any bifurcation yourselves, in terms of COVID casualties and pandemic plays?
Steve Krausz: (13:22)
We have, I think that's if you were to look at it and make some broad statements, anything that was related to accelerating the digitization of healthcare. We've been participants in healthcare IT for quite a while, but we have seen those companies do quite well as the pandemic had reached us. Companies like Omada, which deals with dealing with diabetes and the management of treatment of diabetes from the technology point of view. We've seen anything related to online E-commerce, Primary, which allows young parents to buy clothing for their children in a fashion is quite predictable, that's exploded because people have left stores and moved towards E-commerce for practically everything that they buy.
Steve Krausz: (14:28)
Some of our enterprise software companies, quite frankly, those are the ones, a few of them actually have struggled. Things in the ad tech space, companies that are dealing more with traditional marketing, automation kinds of plays and even sales, since the entire sales industry has [crosstalk 00:14:47]-
Alec Ellison: (14:47)
Do you think that's because retailers or consumer companies have had less budget or more of a fundamental shift beyond that?
Steve Krausz: (14:56)
Well, I think it's part of it is because retailers have had less budget. I think another part of it is that the way in which companies and enterprises have reached out to their customers or manage their sales forces has changed. You don't have a lot of sales people in the field anymore. You don't have the same workflows that you once had where people had to travel or the channels that you did marketing in or advertising in have changed dramatically. So while digitization will allow you to make those shifts quickly, the near term hit in terms of how these budgets are spent and how these tools are used has changed quite a bit. So those have really seen a dramatic effect.
Steve Krausz: (15:39)
Now fortunately, we haven't played in areas that have been particularly hit by large capital budgets going into travel or into hospitality, so we've managed to avoid-
Alec Ellison: (15:56)
Do you think you avoided... was that more luck or was an area you didn't really like that much beforehand for whatever reason?
Steve Krausz: (16:03)
It was more of an area that we didn't feel matched up with our skillset. As a firm, we've always believed that the partners and general partners at the firm should understand the industries that they're investing in very well, where they have deep and networks that they can pull experience, executives out of and people out of. So that wasn't an area that we understood well.
Steve Krausz: (16:29)
Having said that, years ago, just to show you how venture firms change over time, we did a lot of physical retail stores. I mean we were starters of Ross stores and [crosstalk 00:16:39].
Alec Ellison: (16:38)
Of course, yeah.
Steve Krausz: (16:39)
Yeah, we had [inaudible 00:16:41] running shoes, we had a terrific franchise. We moved that to E-commerce but it really has changed over time. I think every venture firm has to have that kind of transition as the world around it changes.
Alec Ellison: (16:58)
Good, speaking with enterprise software for a minute, where you said there has been occasionally some struggling. Now, enterprise software is about as sticky as things can be. In fact, the pandemic is showing that enterprise software, whether it's a maintenance or a SAS model, is probably stickier than your rent. You're going to pay that fee to keep your company up and you were glad to not have to pay the rent. We've all learned that now.
Alec Ellison: (17:26)
So a little surprised to hear that the enterprise software companies are struggling. Is it more than they're struggling to grow as opposed to maintain their customers and that growth requires some face-to-face selling and that's what's slowing the growth, or is there something different at work?
Steve Krausz: (17:44)
Now let me be clear, it's only in specific areas. What I said is it's the ones that had served channels that directly went after sales as traditionally done or the distribution of marketing dollars as traditionally done. I think that also what is happening there is what's happening throughout technology, is the winners are really winning. Whereas it used to be where you would have three or four... it used to be that the top company, people would say the top company got 50% of the business, number two would get 30%, and if you were three or four you might be able to survive and everybody else was gone. It much more is winner take all and it's I think the winners are going to take 70% or 80% of the market, and that's the challenge because I think that there's less opportunity sometimes. That's a challenge in the industry because there are so many companies being started.
Steve Krausz: (18:44)
So it is a winner take all economy right now, but it's also one in which innovation is happening all the time so you can knock down the big dogs in any sector. I don't say easily, but you can do it with great technology and great people.
Alec Ellison: (19:01)
Let me stay with that for a minute. You can knock down the big dogs. A lot's happening concurrently politically, questioning the dominance of the big five that now have half of the NASDAQ 100 market cap. All companies founded, '70s or later, Apple being the youngest, I guess. Apple, Microsoft in the mid '70s, so Apple, Microsoft, Amazon, et cetera. Do you really believe that you've got companies in the valley that can challenge the Goliaths?
Steve Krausz: (19:36)
Well, there are a few names where their size matters and brand matters to such extent that I think that they're going to last for a very long time. IBM had a run of about 100 years, I am not making any predictions about Microsoft or Amazon or some of the really big Goliaths, as to how long that'll happen but I really do believe that innovation has just made tremendous ability to challenge some of the big Goliaths. I'm not... however, we are right now in a period where capital matters a lot and brand does matter a lot, but and these companies are still very young and the teams that are running them are still teams that started them to a large degree. You look at Amazon, look at Salesforce. There's a lot to be said about having that kind of managerial expertise that's used to dramatic change.
Steve Krausz: (20:46)
However, having said that, look at Snowflake. We're not investors in that company, unfortunately. I know some of the board members well, terrific company. They have really changed and are challenging some of the big dogs. I mean, look at SAP, their recent earnings report was very disappointing. I would never-
Alec Ellison: (21:11)
[inaudible 00:21:11] rushed out to say it's a different model. Don't hate us.
Steve Krausz: (21:15)
They are a different model but they were recently a very dominant players and I think if anybody had looked back 10 years ago, they wouldn't have seen or predicted that there might be changes like that. Now again, a lot of it does go to leadership. I think when McDermot left there, it made a big difference.
Alec Ellison: (21:36)
Just to go back to healthcare for a minute. Have you changed your allocation to that sector over the last 10 months?
Steve Krausz: (21:46)
This is interesting. We have, and we have always been unlike many venture firms, we have always been a participant in healthcare. We have always been a participant about pharmaceuticals, as well as devices, and the ratio in the past was roughly 80-20. Over the last few years because of the expertise of my partner John Root and Casey Tansey. John is an MD and neurologist, he understands the changes going on the pharmaceutical industry quite well. Casey, former CEO, but also what's going on in the economy with regard to digital health and the ever increasing change in the entire way the US healthcare system is both paid and delivering healthcare. So we're probably more like a 70-30, 65-35, depends on how you describe the healthcare [crosstalk 00:22:49]-
Alec Ellison: (22:48)
The healthcare [crosstalk 00:22:49] being the 30 to 35?
Steve Krausz: (22:51)
Yes, yes. I'm sorry for not being clear on that. With the healthcare and the healthcare IT side of it, increasing quite a bit. So I think it's going to be an area since it's in the upper 20s as a percentage of the US GDP predicted over time with the aging of the population, but also with the farther involvement of people in their own health management. We're invested in that area quite successfully, and we've made a few investments there.
Alec Ellison: (23:31)
Any specific ones you've made in the last six, eight months that you want to flag?
Steve Krausz: (23:36)
Yeah, I mean I think that if you... one of my partners, [inaudible 00:23:41] invest in a company called Optimize, which does remote patient monitoring. We think that that's going to be an area because of all the devices that we're wearing, excuse me, because of the automation of healthcare records, and also because of the involvement of people in their own health management, remotely managing healthcare I think is going to be a major trend I the healthcare industry. So that's one that we invested in recently and feel real excited about. That was during the pandemic.
Steve Krausz: (24:20)
We've done a couple of others during the pandemic also. We've long been a player in cyber security, and we've been very successful as John kindly mentioned. We were investors in Check Point at its very beginning.
Alec Ellison: (24:34)
Right, I remember well from another side of it.
Steve Krausz: (24:37)
[crosstalk 00:24:37] alongside Shlomo Kramer and his most recent company Cato, which also plays to the pandemic, is a company that it really addresses the fact that the way that the networks around the world were built in the past, heavy on equipment, networking equipment, heavy on networking protocols that have changed over time. Cato allows you to do all of what we're doing today around the world very inexpensively and yet be very secure at the same time.
Alec Ellison: (25:09)
Was this at a seed or A round stage or a little later, or?
Steve Krausz: (25:12)
We were the first institutional investor alongside Aspect, which is now [inaudible 00:25:21], so that was a series A, and have been joined since then by great luck and light speed. Couple of great partners with us and people we like to work with.
Steve Krausz: (25:31)
The investment that we did just recently was in Cyber Hunters, where my partner Jacques Benkoski sits on the board. Cyber Hunters is a company that is, or cyber AI as many know it as, is a company that does extended threat detection and response. What I mean by this is it allows you to do threat detection in a dynamic way, in an autonomous way. You don't have to have all these scripts. It figures out for itself what kind of threats you're seeing. Believe me, that's been an explosion since the pandemic hit.
Steve Krausz: (26:13)
Another healthcare-
Alec Ellison: (26:14)
It was also exploding because of 5G rollout, which just creates so many more devices on the edge too.
Steve Krausz: (26:20)
Absolutely.
Alec Ellison: (26:21)
Correct?
Steve Krausz: (26:21)
Absolutely, and the 5G really hasn't hit yet, it's been talked about quite a bit. I know that certainly Apple's depending on it quite a bit. It's going to dramatically change everyone's experience on the internet and the way that they work with technology. What it's also going to mean though is that again, back to our earlier point, that some of the real big dogs are going to have an opportunity to see some exciting new startup companies go after them. Even though much of infrastructure, as it relates to equipment and semiconductors, has not been a sweet spot for a while for us because of the capital intensity, but for many there is so much capital now that's available, both in venture from the seed stage to the series A to the later stage venture funds, but also private equity firms are getting involved. You're now seeing the rise of SPACs, which is really just a way for large pools of capital to invest in startup industries.
Alec Ellison: (27:36)
So your interest rates do pretty interesting things don't then?
Steve Krausz: (27:40)
Then zero interest rates help quite bit, yep.
Alec Ellison: (27:42)
Yeah, yeah, or they expect working [crosstalk 00:27:46]-
Steve Krausz: (27:46)
Just the flood of liquidity that's coming from all of the central banks around the world. It's hard to see that changing at least over the next couple of years and we could have a different discussion about what it means.
Alec Ellison: (27:58)
So floods of liquidity typically impact valuation? We're certainly seeing valuation, bifurcation in the public market. Are you seeing major changes in valuation in your markets since March? If so, is it altering the stage at which you're focusing?
Steve Krausz: (28:18)
Well, we have seen valuations increasing now for the last few years. I mean if you go and US Venture Partners is primarily a series A. We're not a seed investor but we're primarily a series A, which means from our definition, once there's a little bit of product market fit shown. So valuations have about doubled during the last two years, and from where they were before in the later rounds. In the series A, they have gone up maybe about 50% or so. In the seed stage, it's been flatter, which historically actually has been a pattern we've seen in other periods of crisis where the very, very early stage was hit the hardest. The later stages didn't see the kind of valuation increase but this time they are. I think that that'll probably adjust. I can't quite honestly, it follows public markets, all the [crosstalk 00:29:23]-
Alec Ellison: (29:23)
Yeah, doubling sounds like a lot until you look at Amazon and Apple, or with Apple in particular, triple is flat.
Steve Krausz: (29:30)
Again, going back to the JP Morgan conference yesterday, Mike Millman put up a couple of slides in which he was showing that the market cap if you're talking about for early, for fast growing companies, was now 20 times revenue on the recent IPOs and also on some of the recent public companies for companies that were growing well over 30%. About 13 times revenue for companies that were growing between 20% and 30%. That's astronomic, that used to be PEs.
Alec Ellison: (30:02)
Well again, it's what happens with zero interest rates. That terminal value in the future doesn't get discounted so badly.
Steve Krausz: (30:08)
Right, exactly, exactly, right. So it does have echoes of what we've seen before but I think the firms that have been around for a while and the partners that have been around for a while know how to manage through that.
Steve Krausz: (30:22)
So what we've done is during this period we've raised a lot of capital for all of our early stage companies. When the money is available, we take it. We tell our companies, rather than the traditional one year to 18 months, they better have money for two years plus. [crosstalk 00:30:44].
Alec Ellison: (30:44)
The worse thing to do is run out of money. What would you-
Steve Krausz: (30:45)
You never want to run out of money.
Alec Ellison: (30:48)
Anything you're doing or your firm is doing that you would characterize as contrarian to your [crosstalk 00:30:54]-
Steve Krausz: (30:54)
That's a... I would say thing. I would say that if you look historically at venture capital, what has been contrarian has been our commitment to some of the healthcare areas that venture capital have historically pulled back from a little bit. That was particularly medical devices because medical devices were seen as firms that had to go through the-
Alec Ellison: (31:22)
FDA?
Steve Krausz: (31:24)
... FDA cycle, also had to have phase one, phase two, phase three clinicals, and were very expensive and very capital intensive with modest sized markets. But we've remained active investors in that space and continue to make investments in that. In fact, we made an investment in that space recently, that was one called CARLSMED, which my partners have done, which is a patient specific, a design for a vertebrae implant to solve for ruptured discs and the like, but it's patient specific. So you're putting together all the technology that allows you to build essentially a disc for a particular patient and put it in their bodies. That's the kind of thing that many firms wouldn't have even touched in the past. [crosstalk 00:32:16].
Alec Ellison: (32:17)
So yeah, I tend to agree. A lot of firms have avoided the area because of the regulatory clearance, but devices tends to be easier to clear the FDA on than therapeutics.
Steve Krausz: (32:30)
[crosstalk 00:32:30].
Alec Ellison: (32:33)
It would appear to many that [crosstalk 00:32:36]-
Steve Krausz: (32:36)
[crosstalk 00:32:36] gross margin attached to them and distribution attached to them that's a lot more difficult than therapeutics and training.
Alec Ellison: (32:42)
Oh yeah, absolutely. The therapeutic companies can be worth billions before they even have their clearance or their approval, rather, and aren't being sold at all but the pandemic is clearly accelerating elements or the speed of approval. Do you think that is a secular trend or that it is likely to just be pandemic specific and we'll see a reversion back to a little more of a slow paced regulatory clearance environment? On both the devices and on therapeutics.
Steve Krausz: (33:12)
I would say that what we have learned from past disruptions like this is there's no going back. Once there really is a change and a change that is merited because you have some reasons and in this case the reasons are you have a lot better analytics. The hard part is still the onboarding for trials. I mean we're seeing it today, but look at how fast in COVID-19, we've been able to onboard 30,000, 40,000 people or more for some of these trials. So I think because of the digitization, we're learning how to identify, how to track those people, how to contact them, and how to enroll them. There's so much pressure to improve that cycle that I don't think we're going to go back.
Steve Krausz: (34:03)
Now, it doesn't mean though that we're going to give up protecting patients by doing it properly, but I think that the way in which we process it and the way in which the FDA reviews and makes their approvals will accelerate. Plus, you have more involvement now from competition from China, competition from Europe, and I think that will only make things better from the point of view of putting some pressure and fire under people's seats here to get stuff done.
Alec Ellison: (34:33)
You made a reference to capital intensity, I want to turn to a segment that I don't think your firm has been active in because of its capital intensity, which is space commercialization.
Steve Krausz: (34:43)
Yes.
Alec Ellison: (34:44)
I think I explained to our viewers, your own personal background early in your career.
Steve Krausz: (34:48)
So yeah, early in my career, I was a double E out of Stanford back in my passion, I had a lot of interest in space because my father actually started a company that made deep space antennas for tracking the early Apollo programs and Mercury programs before that. Also, for intercontinental ballistic missiles coming down [inaudible 00:35:14].
Steve Krausz: (35:14)
Then I worked at NASA and at NASA in the '70s, that was the time when Viking was first landing on Mars and that was very exciting to watch. So I've always watched the space area well and I have personally gotten involved with a group called B612 Foundation, which is run by a former astronaut, Ed Lu and Rusty Schweickart helped to start it. That tries to look for large life-ending events from asteroids. So they do some terrific work now, originally were going to put a burden to space that would be solar orbiting, but now they're managing a lot of the data that's coming from smaller satellites. So again, there was an idea that changed too. They originally felt that they had to put something up in space and now they can use all these micro satellites being put up by many venture backed companies and some of the really, the best entrepreneurs we're seeing who share my passion for all things space.
Alec Ellison: (36:19)
So you do believe this actually will be an area where we'll see more venture because capital intensity is declining?
Steve Krausz: (36:26)
I do believe it's going to be an area because the need for capital to do some of these things, especially when it comes to lower with orbit and things around our planet are becoming reachable from a venture pool of capital that's available, but. There's a lot more money that is available in some of these areas that can take it all the way and again, private equity firms, large defense contractors who are looking for other ways to add to their business, and public, private partnership, but you do need a big fund. Our funds tend to be in the $350, $400 million range, series A focused because that's where we really think the best bang for the buck and our expertise is. We like that space, but if you have a billion dollar fund or a multi billion dollar fund, heck, go for it. My hat's always off to my good friend, Ira Ehrenpreis, who invested in Tesla, and then he followed up in SpaceX. So I'll give a tip of the hat to Ira. He just has the conviction and the vision that I'm a little reluctant to step out my partners who'd probably whack me down [crosstalk 00:37:39] strategy Steve, but [inaudible 00:37:42].
Alec Ellison: (37:43)
Well, I know we have about five, six minutes left. We're going to a lightening round of question. I want to ask, we'll pick up on what you just made about your firm. Your firm has stuck to it's knitting, you're on fund number... what number is it now?
Steve Krausz: (37:53)
12.
Alec Ellison: (37:54)
12, right, as John said at the outset.
Steve Krausz: (37:56)
Hold on, my lights just went off on me.
Alec Ellison: (37:57)
Okay.
Steve Krausz: (38:03)
That's because my wife has put in these timers that if nobody is moving around and it's still nighttime out there, she wants to see, anyway.
Alec Ellison: (38:12)
So you stuck to your knitting?
Steve Krausz: (38:14)
Yes.
Alec Ellison: (38:14)
Many of your colleagues, firms, in the valley have not, they're got bigger firms, they have set up all different size firms, stage firms. Why is that? It's obviously served you well, but that's been a bit of a contrarian play in it of itself, correct?
Steve Krausz: (38:29)
That's true. I think that comes from a couple of things. One is, we do have a, from a strategy point of view, we think that good venture investing comes from investors who have been in the industry, who know the industries well, that they're investing in, and choosing opportunities that have a multi-decade capability to do well. So I think we've been fortunate enough to pick areas in IT and in healthcare that really are multi-generational actually, in their appeal.
Steve Krausz: (39:07)
But we also, we did have larger funds back in the 2000 period, in both in terms of personnel and also in size. We were investing basically in the same areas but we realized that it's very hard to do three, four times your money on very large firms unless you have a very fortunate capital cycle and market cycle playing with you. So when we know how to do what we do, and we do it well. We've very selective and very careful in bringing on new partners and developing them. We think that it works for us.
Steve Krausz: (39:48)
Other people have done a wonderful job building large platforms and work for them well. I mean, look at what the guys at Andreessen Horowitz, who I respect a lot, and Light Speed and NEA have done. NEA started the same time that were more or less, and they've really developed a much more multi-asset category. But I think that for us and for our LPs, they know what they're getting when they invest with us and they've had good returns for 40 years now, so. We're [crosstalk 00:40:21]-
Alec Ellison: (40:21)
So being early stage makes you particularly... well, all firms are dependent on the management teams, but early stage maybe even more dependent. So how is your valuation of management teams and CEOs in particular, had to change in our more virtual environment now with Zoom and otherwise?
Steve Krausz: (40:40)
Yeah, I would say that that is an area that we feel very strongly about, in terms of sticking to our knitting, as you would put it, in terms of really wanting to sit down and get to know our teams and their ability to hire teams. So what that has meant in terms of what has changed, is we're leveraging even more some of the teams that we know personally or have close relationships with because despite the fact that this means of communication works okay, hiring a full management team over Zoom, people are still people. It's tough to really get to know what's at the heart of a person's core and identity. How their value system, how they think about people, how they think about hiring. Also, management teams, we rely on them to hire the teams below them. So we're relying more on people that we've seen that have done it successfully in the past than perhaps some others who are willing to do the entire... we've done a few things entirely over Zoom, but it's mostly through relationships that we've already had or people that have relationships with those people. So that's changed a bit. I think that it's probably going to remain the same for at least this investment cycle.
Alec Ellison: (42:15)
So speaking in the last minute or two of getting to know someone better. For our viewers to get you to know you better, just some quick lightening round questions, quick answers. Last book you read for fun?
Steve Krausz: (42:27)
The last... actually, there were two that I just finished. One was Just Mercy, which is Bryan Stevenson, and during this period, what's going on in this country and around the world, I thought it was just a terrific book. He is with the Equal Justice Initiative and it's well worth reading. Then one of my partner, Irwin Federman and I both share a love of history. Years ago I shared a book on The War to End all Wars. He followed up with a book called The Bridge on Drina, that's probably one you've never heard of before.
Alec Ellison: (43:02)
No, no.
Steve Krausz: (43:03)
That was by a... it was written right based on by Ivo Andric, who was a former Yugoslavian ambassador to Germany, and it was about the decline of the Ottoman Empire and the Baltics. I am a real fan of the Balkan states, rather. I have a real interest in history. So it was written about the end of the Ottoman Empire and what happened in the Balkans.
Alec Ellison: (43:27)
So speaking of history, most historical figure alive or deceased, you most want to have dinner with?
Steve Krausz: (43:36)
Boy, the alive or deceased that I most want to have dinner with? I would say that really, especially at this moment in time, it would probably be Jefferson. The reason is, I want to know what the hell he was thinking when he wrote the Constitution of the United States the way he did. There's a whole bunch of things he could've cleaned up, but I think he's a perfect example of an individual who you admire an incredible amount of what he did, and yet on the other side in this personal life and some of his thoughts, you think, how did those two ideas exist in the same brain?
Alec Ellison: (44:17)
Right.
Steve Krausz: (44:17)
That's-
Alec Ellison: (44:18)
Real quick one for you. What kind of smartphone do you use?
Steve Krausz: (44:21)
I have an iPhone 11.
Alec Ellison: (44:24)
Okay, 11 all right. Reasonably [inaudible 00:44:26].
Steve Krausz: (44:25)
Yeah.
Alec Ellison: (44:27)
Then finally, company in your portfolio most likely to become a household name?
Steve Krausz: (44:34)
A household name?
Alec Ellison: (44:37)
I know you love... yeah, so it's not like you don't love all your children but a company that's most likely for [crosstalk 00:44:47]-
Steve Krausz: (44:47)
Well I would change it, a little differently. [inaudible 00:44:49] become a household name in the world in which I travel because again, I'm on the tech side. That would be probably Cato, I think has a chance to be a real leader and ring the bell [crosstalk 00:45:00]-
Alec Ellison: (45:00)
Just for our viewers again, describe Cato again. You mentioned earlier.
Steve Krausz: (45:03)
Cato Networks, founded by Shlomo Kramer, who I've invested with a number of times and an Israeli entrepreneur who's probably been the best security entrepreneur that I've known and watched, although and there have been quite a few that we've invested in. What they do is they really manage the change in the network that you run over. So the entire software stack is going to run in their environment and they're going to allow you to connect all of your devices, keep them secure, keep them well managed, at a much lower price than you have done in the past. So I think that they have the ability to be the software and the backbone that runs all of what we think in the past of telecommunication systems, whether it be the AT&T's of the world or the Comcast's of the world. I think that the software and the architecture, they could be the heartbeat of that.
Alec Ellison: (45:59)
Terrific, thanks so much, Steve. So you heard it here first, Cato. To all of our viewers, thanks so much for joining us. Steve, you're really a great, far ranging discussion this morning. I think back to you, John, to wrap it up.
John Darsie: (46:14)
Thank you, everybody, for tuning into today's SALT Talk. This is the first episode in our Pandemic Venture Innovation Series. We're very excited about this partnership with OurCrowd, one of the leaders in the crowd funding space for venture investments, so we're excited. So thank, also Steve, for joining us. We'll look forward to hopefully meeting you at one of our in-person conferences here in the near future.
Steve Krausz: (46:37)
I appreciate that, John. Again, I apologize for the coloration here because I am sitting here in the dark in California. This room just happens to have a very yellow light. My son is just going to gag when he sees me with the complexion that I have today, especially considering where we are right now in the election cycle, but I've really enjoyed it. We're USVP.com, it's very easy to find us. Please reach out if you have any questions and thanks for the followup. I very much enjoyed the partnership with OurCrowd. I thank Alec for leading me through this conversation, and my good friend Jon Medved, for all of the support that he has given us and the exciting companies that he's started. I think it's a great idea, so.
Alec Ellison: (47:26)
Yeah, no, ourcrowd.com, we currently probably have a dozen individual companies on the platform and all these several funds as well. So please join if you haven't already. Thank you again, Steve, and John.
John Darsie: (47:37)
Yep, thank you, Alec.
Steve Krausz: (47:38)
Thank you. Good night, have a great day, everyone. I can go back to sleep now?
John Darsie: (47:42)
Absolutely.
Steve Krausz: (47:43)
Thank you.
John Darsie: (47:43)
Thank you, all right.