Foundation capital

Q&A with Foundation Capital Partner Morgan Lai

Many tech companies in Taiwan have shown growing interest in working with and investing in startups. But for startups to survive the competition, according to Silicon Valley-based Foundation Capital partner Morgan Lai, they need strong marketing capabilities.

Lai, who sets up Formulate Ventures under Foundation Capital, recently explained to Digitimes why many venture capital funds are changing their investment strategies and what it takes for startups to succeed. She also highlighted the business opportunities of some of the latest technology trends.

Q: You’ve been running a B2B business for two years. How do you identify venture capital investment targets?

A: Foundation Capital focuses on various industries with growth potential. For example, he has invested in Netflix and startups engaged in satellite technology. Business B2B targets businesses rather than individuals. We select investment targets by considering whether they can generate income and grow quickly. A criterion for measuring the success of an investment is whether the company can go public or be acquired at prices several times higher than the initial value. Enterprise B2B mainly focuses on the software and finance industries.

You should have a good understanding of macro trends, then identify the underlying trends through research and analysis, and then list start-up companies under each sub-trend from which you can choose your investment goals.

10 years ago, a startup for seed funding would have been valued at US$3-4 million, but today, perhaps the best target is valued at US$25-30 million, or nearly 10 times more. This does not necessarily mean that current targets are better than 10 years ago, but because there is too much capital looking for a limited number of good investment targets after 10 bullish years in the markets scholarship holders.

The higher valuation means available funds can invest in fewer startups. It used to be that a 3-year fund could invest in around 30 startups each year looking for a potential unicorn, but because Series A startups are now too expensive, there has been a strategic shift to those in earlier stages.

As a result, almost all major Silicon Valley-based venture capital funds, such as Foundation Capital, now focus on seed-stage or earlier-stage startups. I am in the process of setting up Formulate Ventures, a venture capital investment fund, particularly in startups in the pre-seed or seed phase with Foundation Capital as a shareholder.

Successful investment in early-stage startups depends on choosing the right targets. Five startups created by my friends at MIT have seen their business valuation reach the unicorn level of US$1 billion in six years, which motivated me to create Formulate Ventures.

It is usually difficult to decide whether to invest in early-stage startups due to relatively limited information about the company. There are more and more venture capital funds and managers, and the key to staying competitive is to continue to do thorough market research in emerging areas and formulate your own investment strategies.

Q: What is your vision of the startup ecosystem in Taiwan? What are your recommendations for Taiwan-based startups considering tapping into overseas markets?

A: There are three industrial sectors with strong development potential in Taiwan: semiconductor materials, biomedicine and software infrastructure/cybersecurity.

While there were perhaps fewer than 10 AI inference IC design companies 10 years ago, there are over 100 now. Foundation Capital has invested in two of them, Graphcore and Cerebras, both of which have an R&D collaboration with TSMC.

The computing capacity of AI inference ICs has been increased rapidly, but the computing speed and memory capacity are limited due to the materials used. IC design houses in this field must have innovative solutions to survive the competition. We’ve seen a design house replace crystalline silicon with other materials.

For biomedicine, Taiwan has two advantages: its sufficient talent and abundant centralized data available for use in biomedical AI, as well as a well-developed biomedical research ecosystem.

Software infrastructure/cybersecurity, unlike software applications, does not need to be changed to meet the needs of local markets. It also does not require an intensive capital investment. It is therefore suitable for young entrepreneurs.

For Taiwan-based startups planning to tap overseas markets and seek overseas venture capital investment, they need to prove that their products or services are marketable in their target markets and prepare strong marketing plans. The founder of the startup must know how to sell the products and services and build a strong marketing team. In the United States, it is very important that you can communicate and convince your customers in the B2B sector. You can’t expect your app to sell simply by making it available online.

Q: COVID-19 has changed what was taken for granted in the past. What is your vision of future trends?

A: There are three interesting trends. The first is remote work. Due to the pandemic, many companies have to use cloud computing to allow employees to work from home or remotely, collaborate or receive training online.

The second trend is automation. There are many B2B automation software products, mostly solutions customized to meet the needs of large enterprises, in the United States, such as those developed by UiPath and Automation Anywhere. However, the demand for automation from small and medium enterprises will emerge. Unlike large enterprises that need custom automation solutions that must be supported by internal IT resources for operation and maintenance, SMBs will need next-generation automation software that is not not personalized and can be used using laptops without in-house IT staff.

The third trend is B2B automation software for finance teams, such as AI-powered automatic cost estimating and forecasting models.

(To note: This is part of the Women in Venture series, a collaboration with Digitimes strategic partner Anchor Taiwan, a platform to connect the world with Taiwan focusing on business innovation and cross-border expansion. The Women in Venture Roundtable is a network of over 80 women investors and bi-monthly sessions with world-class guest speakers. More info: Anchor Taiwan.)

Morgan Lai, Foundation Capital Partner
Photo: Michael Lee, Digitimes, July 2020