Lu Zhang, Founder & Managing Partner, Fusion Fund, USA. Lu talks about investor thinking during challenging times and their approach. She believes the current situation is also an opportunity to fund good startups at lower valuations. She has advice for investor community in responding to the change.
Read about Lu Zhang (https://www.linkedin.com/in/luzhangvc/). This discussion is moderated by
- David Cao, Managing Partner, F50 & F50 Elevate, Partner, Hanniwell Lake Ventures
- Dr.Prathamesh Prabhudesai, Cofounder of Save BVM F50
Global Insights is a series of webinars on ‘Elevating HealthTech Innovation’ and brought to you by Silicon Valley based F50 & F50 Elevate. F50 serves a community of VCs, Investors, angel investors, Corporates, startup founders, entrepreneurs and thought leaders. F50 Global Capital Summit(GCS) is among the leading investor events of Silicon Valley. F50 Elevate is a pre-Series A HealthTech startup accelerator based out of Silicon Valley.
David Cao: Welcome to F50 Global Insights. Today is our week two of sessions. Today, we have two great speakers. First I want to first ask my co-host Om to introduce himself.
Prathamesh: Hi, my name is Prathamesh. I’m a physician by training and I’ve been working with F50 since the past one and half year. Along with that I have a medical device startup called SafePBM. And what we do is we make the manual resuscitator which is used in emergency airway management functions like a transport ventilator, which is used in critical care.
David Cao: Thanks Om. Lu.
Lu Zhang: Hi, everyone. This is Lu. I’m the Founder and Managing Partner of Fusion Fund. We are a Silicon Valley based VC firm focused on early stage tech and healthcare investment. Before I went to the dark side as an investor, I was running my own medical device company focused on Type-II Diabetes diagnostic. I sold that company to Boston Scientific and then later start to do investment also with a focus on healthcare.
David Cao: Great. So as you are investor, the question today is about the investment environment in Silicon Valley as well as in North America. I believe this virus outbreak is a sickness and the bigger than any people had predicted, especially for Silicon Valley as well as North America. What are the impacts to the venture capitalists in the valley? Maybe I’ve started this question to you, especially an impact to your fund.
Lu Zhang: Sure, so actually for us I would say definitely, as you said, is a huge impact on the economic and also Silicon Valley. And for VC, luckily, we have the flexibility of work remotely. So in terms of fund operation, we’re okay so we still be able to continue to fund operational talking with the founders and also spend more time on the portfolio management. I will say the only difference for us is now we’re being more picky when we’re talking to the new founder. And we’ll also focus more on their cash flow, management capability when we’re talking to the new founder. Meanwhile, we’re spending much more time with our existing portfolio company especially like roughly twelve company where seat on the board seats we want to make sure they have the right strategy to go through this crisis and meanwhile, have the enough cash flow bank for another 12 to 18 months is cash flow in order to you know, be the survivor and ultimately become the winner. So working with a close eye on our existing portfolio, but other than that, luckily, our investment sector focus does not impact at all as we always investing b2b focused business model type of company, tech savvy company and their revenue grow is pretty steady and solid. And for this corona virus, the company investor, the VC investor Consumer tech probably got the impact of most but for us, enterprise b2b actually have much better cash flow situation. But for the general VC industry, we definitely heard lots of changes. For example, we heard several VC from including bigger one, smaller one, they’re taking next three to six months off, which means they’re not actually making any new investment. They try to observe what’s going to happen at the progression of this crisis and probably allocate capital later. Another one we found is actually lots of the existing also VC they try to work a lot what spend lots of time with existing portfolio company but also not necessarily have enough pro-rata capital to support them in their later stage rounds. So we’re probably will see a much faster speed of you know, company going to die because not enough cash flow or not enough supporting capital from existing investor and also competition from VC going to get tougher as well as we’re gonna be more concentrated the capital to the top tier startup companies. So definitely going to be harder for founder to raise money and also going to be more trickier for investor to preserve the company. But in general, we always talk about the downturn is the best time to invest in a good company at earlier stage. No matter Facebook or Google they’re all founded at a downturn. And as I mentioned, as a capital we see going to be more concentrated, the chances for the company established now to become the future winner will be much higher. So it’s still good time to allocate capital just you need to vary capital about a strategy and also be proactively to interact with existing portfolio to protect an existing asset in will allocate a future company.
David Cao: Okay, great. But, the reality is that the pressure or the problem is not evenly distributed. There are many startup are dying. There’s a small number of startups get some very quick funding because their business are related. So, may be you can share us your insight, particularly in the HealthTech industry. What are the sectors has pretty big benefit? What other sectors are facing very big risk?
Lu Zhang: So yeah, so for healthcare industry, I would say definitely, as you mentioned, there’s also lots of strategy changes required for the VC. As I mentioned, we also see lots of VC start to think about general strategy to be more focused on B2B. Another is definitely healthcare, and this corona virus also really show us the big challenge in the healthcare industry that diagnostic devices, diagnostic technology is not good enough. So for us, we’ve been investing heavily in healthcare, especially diagnostic technology and also AI healthcare and new tech emerged as a healthcare for a long time. Now we saw, we heard more and more VC and the founder kind of reply to us saying that they really see this big challenge and also big opportunity, be able to bring new technology to the traditional sector, especially to healthcare and also say the good, like a huge value of doing the good diagnostic technology will always help us, well, definitely help us prevent a disease but also help us save loss of health care expenses if we could stop the disease to progression to the late stage. So I think that’s definitely a good indication for people to start allocating capital to healthcare focused innovation. And also on the other side, it’s a lesson learned for no matter VC and founder be able to really think about what is the long term opportunity versus only focus on short term gain.
Prathamesh: So another question is now because of the virus, there’s also a market crash and global lockdown. How does that affect someone like you who manages a large fund or is raising a fund?
Lu Zhang: Yeah, so definitely as I said I was talk about people ask me, okay this is corona virus Black Swan it is a one-time thing if you think it’s going to lasted longer. To me I kind of feel it’s just a regular business cycle recession. It just corona virus make it happen sooner but after this even corona virus getting better in the summer time we’re going still have suffered a recession now with other business like the economic cycle. So definitely a huge crisis as you mentioned, it’s also have big impact even long term impact for VC, VC venture capitalists. I definitely know lots of VC firm their star rating this year. Again, I’m a definitely going to take longer because institution LP, the amount of family office, our endowment funds. Fom what I heard, they are having all this urgent meeting because they have large allocation to the public market. So they are basically overwhelmed by the discussion of how to really deal with a situation. So definitely take longer for the VC who are trying to raise now, but on the other side, what another thing I heard is some traditional big institution LP and endowment fund that they found out, okay, the reason they have lots of loss during this crisis right now is because they don’t have enough diversity in their portfolio. Then they’re also thinking about having more diversity in the future allocation, especially for their VC investment, not only focusing on the traditional top tier VC, now sand hill, but also they’re looking for new emerging manager, especially emerging manager with a focus of a company that was more solid, under stable growth, be able to really go through this crisis with a steady growth.
So there’s definitely pro and con. And on the other side, as I mentioned for founder, it’s also good opportunity for VC to stand out during this crisis. Every time when we have a crisis, there’s also huge opportunity for people to really grow rapidly with the trend so that’s definitely a good thing as well. On the other side as mentioned, it’s not only corona virus, this is also the business cycle recession so unfortunately worried this process of double dip of recession so it might be worse even than the last recession of 2007 & 2008. And I also say that don’t blame corona virus for everything. Just corona virus really give opportunity to show the inefficiency of the health care no matter service or healthcare industry in general. Because corona virus without is a huge challenge especially for the global supply chain now we’re suffering the matter US, China, Europe, all this different country. And meanwhile, as I mentioned that the tech company in Silicon Valley, they start to really prepare themselves, for example, for new recruiting, try to cut internal costs since last year because people are saying that this might happen. And now the good thing is lots of the large company, they have huge cash on hand. So they are able to maintain their business they don’t need to worry about going through this virus. But also same thing for VC, if VC has enough capital for like different VC have different strategies. Some VC only have capital for initial investment without further capital support to the next stage like a pro-rata investment, then they may have a hard time to really for the support of their existing portfolio company. For the VC like us, we have to certify our founder allocate for pro rata investment. So for any $1 I invested Initially, I have at least $2 to $3 for following investment. Initially, definitely the purpose is try to help us to maximize the return want to put more capital into the winners, but now also give out the flexibility and leverage to really support our portfolio company to make sure they could become the market winner. And as I mentioned, who become the survivor, who cannot be the future market winner, because their competitor going to be much less after a couple months and meanwhile the market is going grow much faster when they’re only capable players on the market.
David Cao: I have a follow up question. I do believe still the pressure of all opportunities are not evenly distributed. Between the early stage Angeles, small VCs, maybe midsized VCs as well as late stage VCs or even PEs is which one do you think are better in the position of benefiting from this crisis? I’m talking about HealthTech investors.
Lu Zhang: Yeah, for HealthTech. I will say it’s kind of similar for HealthTech and also general tech investor maybe a little different as I will say for healthcare the investor, early stage company definitely a good time as I mentioned market downturn have opportunity for VC and even early angel investor be able to invest in good company with very cheap price. We are already seeing that valuation probably going to drop at least 20% or 30% in the next couple of months. Another thing is the capital will have more leverage be able to pick the good founder.
But for healthcare, another thing is, as I mentioned, we see this a huge challenge of inefficiency in the healthcare industry and also diagnostic technology is not mature enough or good enough for us to really know, for example, do the early stage diagnostic for Corona virus. So for some growth and late stage company with a mature technology focused on the diagnostic or AI in healthcare as computing healthcare to improve the efficiency of their healthcare system may also get good market opportunity. But in general for late stage, VC, late stage VC investor or late stage company now it’s a tough time.
We all know that for the past couple of years are so, challenging Silicon Valley is that high valuation? Well, let’s talk about high valuation is the illusion Why? Because when market goes down, high valuation also give the company a much hard time to raise next round because they need to justify their number with a much worse market situation. And for the growth or late stage companies, especially the work they are doing very well unfortunately, most of them has a pretty high valuation. And we probably will see some companies start doing down round and which can also be a big challenge for the growth and late stage VC because they need to think about which company they’re going to save to maintain their valuation or which company probably they have to let it go. You know, for growth and late stage, it is not like early stage, for example certain percentage of their companies go away. It is going to be very challenge for grow at a stage VC right now but on the other side as I mentioned, at this time capital is more even more important will probably be will probably have lots of complaints other mega funds previously saying this the fund size is too big like $3 billion, 8 billion dollar. But on the other side we have to admit now with this market situation, the mega firms will have much bigger leverage to deciding who’s going to be the survivor in the growth and late stage within their portfolio and also across the market. The VC firm who does not have that huge amount of capital, even they’re a good VC, they probably have a harder time for competition and they also help their portfolio company for competition.
David Cao: Okay, look, time is running very fast. So I want to invite Lu to give a summary of suggestions, especially to our investor community.
Lu Zhang: Yeah, I would say the first suggestion would be, really work closely with your existing portfolio company. From what we did. We send out an email since a couple of weeks ago to really kind of learn the founder about the corona virus situation. Actually, last year, we’re starting to, you know, talk with our existing portfolio company, potential risks on the market that they need to work on their cash flow issue. And we also have all this check on meeting check on conference call with them for the past month, in order to make sure they have the right strategy and because we do all of this, the preparation is already on. When we have a recent check with our existing portfolio company, they’ll have atleast 12 to 18 months or more than that for cash flow, which means they’re going to have much better situation going through this crisis. So definitely spend time with your existing portfolio company to make sure they have the right strategy, know where to find the capital if needed, and also encourage them to talk to their existing investor to find out how much capital support they could have. And another thing, as I said, reserve capital is very important. And once I would talk about reserve capital to support an existing portfolio company to make them become the future winner, but another thing we need to think about is having a reserve capital could also make sure you could place the dissent or defensive investment. What I mean is during last crisis, we’ll see the situation happen. And some investor may putting the term for the next stage and other VC basically to pay to play. If you don’t have reserve capital, you probably got kicked out from this round, even company continue to grow, you’re not in there in the game anymore. So it’s, that’s how we call the defensive play with the capital reserve. So that’s also related to the investment strategy. And that are saying, as I mentioned earlier, as really think about a strategy shift. If you’re more focused on consumer investment, and also meanwhile don’t be scared of the by the market. When there’s a big risk, there’s big opportunity. And if we grab the opportunity in the right way, we’re going to be for next generation of the future leader for the VC industry.
David Cao: Thank You.