Silicon Valley TV

Ken Elefant Managing Director Sorenson Ventures Sorenson Ventures on Covid-19 crisis for startups

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PEMO (00:01):

Welcome Ken. So nice to speak to you again. I was wondering if you could tell the listeners what your main focus is for your investments.

KEN (00:13):

Right? So I co founded Sorenson ventures, which is an early stage venture fund back in 2017. And we focus on early stage security and software investments fund was $110 million fund. And we typically invest in companies that are pre-revenue or have just a little bit of revenue.

PEMO (00:36):

Great. And such a name for the security space I would imagine at the moment how are you managing your portfolio companies at the moment with the crisis.

KEN (00:49):

Great question PMO. So, you know, from my point of view, I’ve been doing this for 21 years. So I got into the venture business back in 1999 and saw the real uplift at the internet age, and then the, the downturn in 2000, as well as the financial crisis in 2008 in my philosophy in terms of how to work with portfolio companies is that you, you need to be consistent. You need to look at what a product roadmap should look like or where their short term and medium term and longterm, and you should look at your, go to market over the short term and medium term and longterm. And when you don’t have good milestones that are set up, that are achievable, that’s when bad things happen. And so whether it’s good times or whether it’s bad times the way that I like to work with the startups that, that I’m on the board of is to make sure that we do have milestones for each part of our business. And if things aren’t working because we either have the wrong people or because there’s a financial crisis, then of course corrections need to happen. And that’s exactly what we’ve been seeing over the last four months with the COVID-19 issues.

PEMO (02:10):

Right. And are you still investing in new companies and if so, how are you managing to do that?

KEN (02:18):

Well, absolutely. So in the last four weeks, we’ve actually made two new investments in Sorenson ventures. And we also made one large follow on investment in one of our portfolio companies. So, you know, my point of view on this is also the same there’s companies that are going to succeed through both good times and bad. And in this type of environment, the entrepreneurs that we like to partner with are the ones that, that I just talked about that are milestone-based. And we, we think that right now there’s some really good startups that are yet to be born, that we will become market-leading companies. And what I’ve seen is that throughout every downturn, that’s when the best new companies are brought to market. So if you look at the, the downturn in 2000 there’s a security company called four Scouts. That’s in the network security space that I was involved with when I was at Intel capital. That one was started right after the 2000 downturn alien vault than other security company that built a product that really helped security for small and midsize. Customers was born right after the 2008 downturn. So now’s a great time to invest in really only the best entrepreneurs are starting new companies these days.

PEMO (03:51):

So I guess it’s the whole everyone’s saying that there’s always challenges and opportunities in a crisis. And what I’m hearing you say is that definitely people come through and really shine out of a challenging time. So what are your personal thoughts about how to survive this current crisis? Obviously everything’s become virtual. I know for myself, I’m definitely appreciating the valuable human connections that I have because I can’t see them at the moment. But I was wondering if you’ve had any personal revelations yourself during this time shelter in place.

KEN (04:33):

Yeah, certainly it’s, there’s a, there’s a human aspect to it. And obviously there’s a business aspect, you know, for me I, I’m definitely a people person, the way that I like to learn about startups is through people. And so that’s just part of my personality and I like networking with people. So with shelter in place that definitely has a huge effect on, on how I like to run my life. And so what have I done, you know, on Friday nights, I now do virtual poker with a bunch of buddies of mine. That’s been, that’s been awesome. So not only do we talk about our families, but we have, we have a little fun you know, it is a little lonely working from home and being on, on zoom calls all the time.

KEN (05:28):

You know, I, I also think it gives, gives people a way to connect with other people and really appreciate what they are doing on the other side of, of the zoom call. So, you know, for the entrepreneurs that we backed, I’ve really gotten to see them interact with their families. You know, a lot of times they’ll have kids that interrupt a zoom call and it’s really cool to make that personal connection in that way as well. And then, you know, the third thing that I’ll say is, is that you can’t sit on your butt all day and do these zoom calls. So what I love doing is doing a socially distance hike with entrepreneurs and one of the new investments that we just did. I had done all of the due diligence with the entrepreneur on zoom, in on phone calls, and finally went on a socially distance hike with him up in San Francisco.

PEMO (06:25):

Oh, really fun. You’ve been very creative. I’ve seen it as a enforced retreat. So, but I love all the things you are doing. That’s fabulous. What do you think startups should expect in the next 12 and 24 months? Because I know it is very hard to predict anything. I don’t think anyone really predicted what, what we went into in March, but I just wondered if you’ve got any ideas or thoughts about where we’re going.

KEN (06:58):

Yeah, it is very, very hard to predict what’s around the corner. You know, there’s, there’s two thoughts for it first off is that for a lot of our investments that our insecurity security is going to be required and in good times and bad. And we’ve seen that while the pipelines for most companies slow down in March and April, we’re starting to see a really good pickup in, in may and June and hopefully beyond still having said that there’s another camp that would think that there’s going to be a lot of trickle down effects that we don’t even know what is, what is going to be those effects six to 12 months or beyond. Because if there’s a lot of businesses that are going out of business, obviously those businesses can’t pay their real estate landlord. And those real estate landlords cannot pay the bank.

KEN (07:55):

And if that’s a regional bank, what kind of effect is that going to have on the local economy as an example? So I think there are, there are two camps. So what, what I’m planning on doing is, is what I discussed at the beginning is that for every startup they need to set milestones that they think are achievable. And when the metrics that they’ve put in place don’t seem to be working, then they need to change approaches. It could be that you have the wrong person in the seat. It could be that you are that you have too many people in the company and you need to cut back until you figure out what the right product market fit is in this environment. My sense is, is that most companies are going to do just fine, especially if they’re in the, in spaces that are considered a requirement and not a to have.

KEN (08:57):

The second thing that I’ll say is that we focus on companies that are not that capital intensive. And so our companies have been very fortunate in that. If you do need to cut burn rate from 400 K a month to 300 K a month, it is not that difficult for a company to do that. Versus if you were burning $2 million a month, they need to come down to 600 K a month in burn. So that is another way that I, that I think PMO, that we’re looking at managing this through the shorter term and longer term.

PEMO (09:34):

Got it. And I’m particularly interested in security because it’s just such a critical piece for all technology. So it’s wondering if you could give us a little of a view in your privileged seats that you have of what you think is coming as regards a security,

KEN (09:53):

For sure. Yeah. I think there’s a few new trends that are happening. And I started seeing this about 10 years ago in that startups would have a very difficult time selling to enterprises because they would need to sell from a tops down perspective. And so what I’ve seen is that some of the best security startups out there are selling from the bottoms up. And what I mean by that is that these startups can sell initially an open source solution. That’s free to companies. They can see the usage and then they can build their paid for product on top of, on top of the open source solution. So an example of that in our portfolio would be a company called bridge crew, which has seen the trend in that enterprises are moving to cloud and putting a lot of operational apps in the cloud.

KEN (10:48):

And now they need much better security around cloud. And they are leveraging an open source solution called checkoff that enterprises get a lot of value out of, and then they can partner with bridge crew to continue to codify security for the cloud. Other companies use a bottoms up premium model where you get the initial use of the product for free. And then there’s, there’s ways that enterprises get more and more involved in using the platform and then pay for it. Some companies security companies now have a completely agentless solution. And what that means is that enterprises don’t need to install any software on their servers or inside their network and by doing so it’s much easier to show value. And you’re not depending on an enterprise to implement anything for you to get the first step of value inside the enterprise.

KEN (11:52):

So companies like psychotic Neato are doing a really good job of showing an enterprise what their attack surface map looks like. And then they can look at where there’s vulnerabilities and see dig down deep and do attack validation to see how far those vulnerabilities and what the context of those vulnerabilities are inside the enterprise. And then there’s, there’s other companies that are doing a really, really good job of leveraging the channel. So alien vault did that by leveraging a managed security services providers and companies like NSA, which is an anti-fraud company is leveraging the eCommerce platforms like Shopify and WooCommerce and so on, and as well as SAP HANA solution. And what they do is they integrate natively with these platforms and offer anti-fraud capabilities. So to answer your question PMO, the nature of security has changed completely. And I think the bottoms up sales process for security is an important trend to follow.

PEMO (13:03):

So one last question that I’m interested in, a few of the VCs that I’ve interviewed have said that, you know, they won’t be having live meetings anytime soon, they won’t be flying. And that their portfolio companies are not going to be visiting clients. How do you think that scenario whether or not you’re, you’re implementing the same effect is going to affect business in Silicon Valley?

KEN (13:32):

You know, it’s interesting. I think that some, some companies actually benefit by doing the sales remotely because when they were trying to go and sell inside of an enterprise and do it face to face, they needed to have all of the different constituents inside of an enterprise in one place. And that was always difficult. Whereas now it’s much easier to set up a zoom meeting and get different constituents involved in that and move the process forward. I think when you need to actually implement your software product and get it installed, and you don’t, and as a startup, you don’t make it easy enough to be able to do that for the, for the customers to be able to do that on their own. I think those are the types of companies that are going to be extremely hurt by not being able to go visit their customers physically do do the install. So, yes, yes,

PEMO (14:33):

Because they’re saying most of the VCs are saying until there’s a vaccine and I did happen to see a a video of an Australian researcher who’s working on the TB vaccine that they’re trialing. He said that, you know, he didn’t think that there would ever be a successful vaccine because they’ve never been successful with flu vaccines. And he thinks it’ll just burn itself out that this virus. So that obviously means that it could be a long time before we go back to normal, if we ever do

KEN (15:12):

Yeah. A PMO. I don’t think that is going to be normal the way we used to think about normal. You know, I think, you know, sadly I don’t think we’re going to be shaking hands or giving each other hugs as much as we used to. And you know, what I’ve been just completely jazzed about is the perseverance that I’m seeing from entrepreneur is not, you know, not only in our portfolio, but around the Valley and that they figured out a way to continue to add value to their customers. And even if you can’t visit a customer face to face they are still making a lot of progress these days. So I’m, I’m very heartened by that.

PEMO (16:02):

Yes. Yep. That’s fabulous. And I guess the ones that are able to do that will be the ones that’ll still be here. When we find out what the new normal is and the ones that don’t probably be gone. So,

KEN (16:18):

You know, the, the other thing that you didn’t ask is that, you know, in the past, I do think that there were too many startups that were funded in each space. And so it’s sad, but I do think that these, these startups that did not have complete differentiation that weren’t adding a lot of value to enterprises or, you know, that didn’t have good financial strategy and didn’t, didn’t raise enough money to meet milestones. Those are the ones that are, that are going to be hurt. And I actually think it’s going to be quite good for for customers as well as venture firms and, and the entrepreneurs to have a well down set of startups.

PEMO (17:06):

Great. Well finishing on a positive note, there can always lovely to speak to you. Thank you so much for your time today and all the best.

KEN (17:15):

Thank you very much. It was a pleasure chatting with you.

PEMO (17:18):

Okay.

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