Climb By VSC: Episode 9

Published December 28th, 2022

In our latest episode of Climb by VSC, we speak with Harsh Patel, the Managing Partner and Co-founder at Wireframe Ventures, where he invests in seed & early-stage startups aiming to improve human health and the planet. He was an early investor in companies like Palantir, Mammoth Biosciences and Goat. Before that he was Co-founder and CTO of Orbit Commerce, a company that was eventually acquired by Digital River. Harsh is passionate about empowering startups to grow and scale with the right funding, mentorship and strategic advice.

For The Health of The People and The Planet

Vijay Chattha: Welcome to climb by VSC. This is a podcast where we interview guests on their perspectives and best practices for company building and climate tech. And I'm thrilled to have one of our CO investors and friends, harsh Patel from Wireframe ventures. The fund is a seed stage fund, helping founders improve the health of the people and the planet. And Harsh himself has 20 years of experience in building, operating, and investing in companies.

Harsh Patel: Great to be here.

VC: Let's dig in man. Tell us about wireframe and sort of, you know, your entrepreneurial journey to get here.

HP: Thanks again for having us. I started out actually as an engineer then became a founder. A founder twice actually, went back and forth between being a founder to VC and then ultimately combined those two things. The only way you can be a founder and a VC at the same time is to start your own venture fund. And that was a very long journey and we can dive into whatever parts of that are interesting, but I'd say the reason we founded Wireframe, a couple of reasons. One, first and foremost, we saw venture really grow when I was a young founder. The first time in a very long time ago, venture was two or $300 million venture funds. There were no micro VCs, and there were no billion dollar funds, right? We were kind of in the middle. And then over the years, we started to see these megafunds establish themselves, and then you started to see the proliferation of micro VCs, which is great. We, my partner and I, Rob, were a predecessor fund which was kind of in the series A to B stage and we decided that in order for us to be the best at what we can do, and also make the biggest difference, we should either get bigger or get smaller. And the right answer for us was to get smaller. We wanted to be seen in Preseed because we wanted to work with founders very early in their journey. And part of that was because we saw so many mistakes that typically happen by the time they got to series A and we thought that having been in that chair for so long, we could bring that value proposition to founders closer to day one.

VC: Excellent. And let's come back to those mistakes as we go. But so you're Pre-seed and Seed what's like typical check size these days?

HP: Up to $2 million check these days to lead a seed round. We prefer to leave when we can we can obviously write a smaller check when it's Pre-seed, it can be down to a few 100k. We prefer to lead or co-lead whenever we can, because we want to be active participants.

VC: Okay, got it. And then how about sort of one thing we're seeing is like a bifurcation of types of climate deals. There's hardware deals, and then there's software deals. We're already seeing that.

HP: My personal background is software. I was a software engineer myself, of a big data background. But we've done tons of hard tech, deep tech hardware and SAS right. And the last thing I'll say is that I think one of the things that I'm most stoked about in climate capital is kind of the intersection of the mixing of traditional software, machine learning data, with chemistry, biology, material science, etc. Right. So mixing those together in interesting ways, I think is a huge source of opportunity for startups in climate.

VC: Got it. So one thing I've learned as a newbie investing in climate tech is that there's so many different sciences out there that matter to where we want to get to for this planet. So how do you diligence these subjects like when you look at these boundaries, like how do you diligence things like this is a very specific material science company in this space? How do you think about deciding on backing some of these areas do you have like advisor networks? Are you betting on the founder or like what how do you think about that?

HP: Yeah. Look, it's a great question. And, you know, I'll point out that we think about climate tech as a theme, not an industry or sector, right? Because it's not a monolith. And kind of embedded in your question is, if we're talking about, again, decarbonizing the global economy, we're talking about changes in consumer behavior, changes in financial market behavior. We're talking about b2b kind of behavior shifts, right. This is across, you know, every spectrum that you can imagine. And it's across technology, right? It's everything from biology to pure software to consumer products, right. And so I don't think anybody could, with a straight face say that they're experts on every single sub sector of the economy or every single sub sector of technology. We have fairly deep, long standing networks that we can look to both founders and people in industry that we can look to to help us diligence those things.

VC: Got it. What are you seeing in terms of the founder profile coming in right now? Meaning first time founder versus second time founder in something sustainability versus second time founder coming from traditional tech.

HP: So I'd say that the most exciting thing happening in climate for me right now is the intense interest in flow of talent, right? Not necessarily people who've already made the move, although there's a ton of people have already made the move, but also folks who really would like to, and talent is the lifeblood of startups. For us, I think that the number of people who want to create new companies as well as well as those looking to join exciting companies in climate is the single biggest kind of leading indicator for us that there's huge opportunities to come right.

VC: So you're seeing this influx of talent is coming in. When did that happen? Could you actually think about timeline?

HP: I think it's been happening. I think it's been happening for years, but I think it's really starting to inflect almost within the last year or two. And and, you know, I think part of it is driven by COVID and the pandemic. I think part of it is different by the fact that climate change is now impossible to ignore for any thinking person. For anyone that is paying attention to what's going to happen 10, 20, 30 years down the road. I think it's no longer a back room kind of conversation. It's front and center. It's a kitchen table conversation. Life is short, and people are more in tune with mortality as a result of a global pandemic. I think people have kind of a realization that time is precious. Don't waste it. So if you're a badass engineer, you know, do you really want to be doing ad optimization for the rest of your life? Maybe you did do that. Maybe you made some money doing that. But if that's not where your heart and soul is, why don't you apply your innate skill set to something that is equally lucrative. Right? Again, like to be really clear, like you can be extraordinarily successful. But you also get up every day and be more excited about what you're doing.

VC: Yeah. It feels almost poetic that web two and crypto are shifting the labor. At the same time climate has the capital to back these people. I mean, doesn't it almost mimic what's happening? Timewise?

HP: Not to steal an Elon phrase right, but power to the people right? I mean, people at the end of the day, we're going to have to take this bull by the horns and fix so much of what is broken, speaking specifically about climate, but in that opportunity, the governments are doing extraordinary things. The US just passing the inflation Reduction Act, which was the single most kind of compelling piece of legislation around climate, passed here. Extraordinary amounts of money, right. $370 billion allocated and we think that leverages into $3 trillion worth of commercial sector. So you've got extraordinary governmental intervention, but that's not going to be enough. It's never going to be enough, right?

VC: Yeah. Okay. Two things. This podcast is for the founder. So what are the mistakes they're making, pitching you at the Pre-seed and the Seed, and what are the mistakes they're making, once they've received Seed funding to get to the A?

HP: Yeah, great question. So first off, I'll say you know, and I genuinely believe this having been a founder twice myself, right? Every every startup every founder is a unique snowflake, right? I mean, you know, I try really hard not to stereotype people. Because I didn't want that to happen to myself, but there are certainly patterns that we see. And so on the pitching side, I mean, I'd say I'd say it depends on whether or not you're talking about like, we talked about a few different phenotypes or profiles of founders, right? If you're somebody that's like a second time founder or somebody coming out and moving into climate, that's a different set of, of maybe questions or challenges for that founder. I'll give you an example. It might be making certain assumptions from classic tech. That may not translate, right might be you know, milestones might be different, right? Let's say that you have real experience in enterprise SAS. There's a really well understood set of metrics that you'd be tracking, right? You'd be looking at CAC and LTV, you'd be looking at your SAS numbers, you'd be looking at Net Revenue retention. In this case, certain parts of climate might have more complex distribution channels and or go to market challenges that you don't you know, that you aren't necessarily as used to so so there are certain things that you run into, that I think you can't take for granted as a founder coming in from that point of view. And the best way to answer that, I think, is just do your homework around the topic and subject. And it doesn't mean that you have the evidence yet. But it does mean that you've done the homework and you understand that if I'm going to be in this business, like if I'm going to do a fermentation based, you know, synthetic biology company, you should understand what the commercial attributes are that matter to you. And not a pitch for business.

VC: Makes sense. So now that's really helpful. Talk about now that they've raised money from you at the seed getting to the A, what are the biggest mistakes you're seeing? That can be corrected?

HP: I think the single biggest mistake is to think that the A is the same as the Seed. Whatever got you here to the seed round, it's a different sport now. Right? And I think most founders just don't get that because they're, you know, if, especially if you're a first time founder, right now you have one data point of experience, which was the experience of raising your seed round. But the experience of raising your seed round was primarily driven by the force of your personality, your narrative, your credentials as a founder or team, your clarity of vision and purpose, your game plan your hypothetical projections often right? And the reason is, is because the worst thing you can do is to do the classic I'm just going to keep doing this until I'm almost you know, three months from running out of cash. And then I'm going to think about my series A as if it's going to fit into a schedule it doesn't. You raise your series A when you deserve it in the best of cases, right? Not when you need it, because the next investor, they don't care. It's not their problem. Right? They don't care if you need it, they don't care if you're running out of money, you raise a Series A because you deserve it, and you deserve it because you've proven some things to retire certain levels of risk between the seed round and the A round.

VC: That's great. So as you're thinking about the A, let's say you're looking at a deal Pre-seed. Are you talking to the A friends and saying, Hey, what are the metrics for this kind of a business when we bring it to you? Do you inherently kind of have a guess on it?

HP: In some cases yes. And other cases, we just sort of know, right? Because, again, we used to be those guys in some sectors. Then we also sort of understand that traditional metrics aren’t likely to apply just because you're in climate tech. If you're a b2b SaaS company, well, we'll just default to looking at b2b SaaS metrics and milestones, right? That's not always fair, depending on the nature of the business. But it's a good starting point.

VC: So I see the series a metrics all over the place for different types of companies and in this theme, right? It comes down to the industry, but some things I'm seeing different approaches. It seems all over the place to me, seems a bit arbitrary. How was that derived?

HP: You know, honestly, I think it is all over the place. And I say the same thing about investors that I as I said about founders and companies, right, each one is a bit of unique snowflake right a bit you know, people don't automatically subscribe to the exact same playbook, right? There's 1000’s of investors out there and everybody has their own unique take on it, which is great. By the way, like that's an extraordinary climate for, for companies, right? I mean, in the old days, you had such a narrow group of VCs, who I think had a narrower band and how they would assess any company. But that was just a tougher environment. For founders, you had to fit a certain profile pretty cleanly, broadly speaking, and now that you have such a diversity of investor types, and just the sheer quantity of investors and also that it's more geographically distributed, I think you have a lot more diversity and how investors would assess a company in a given stage at a given sector, right. So that the, you know, a thoughtful understanding of that market might result in a different set of metrics that I would look for in a company and maybe a smaller, competitive set, right? Like maybe there are just fewer people on planet Earth. Who can can do it with you, right, like because of the nature of the science or the tech.

VC: How right and that's it's very interesting. It reminds me of some of our companies where they're very small industries like meaning there's only so many companies in it, but there's only so many global players that initially you're like, man, we got to stand out from the noise ,cut through the clutter. And then at some point, you're like, wait, we just can't piss off these five people. Right? It's like the whole communication strategy changes.

HP: And it's bad, right? Like it's bad. Like, like, like, the good thing about having a very broad customer is that you're not so concentrated, you're not so dependent upon one account, hey, we didn't sell that account, or we lost that to a customer to a competitor, fine. Go off and get somebody else. There's tons of other accounts out there. Right. The flip side though, is that every one of those accounts is like a tiny chop of the tree, right? Like you got to chop chop, chop, chop, you got to swing your axe over and over. And over and over again consistently for a long time in order to really, you know, make a big impact. So the urgency and the pressure around certain customers is different in that dynamic, though.

VC: Yeah, makes sense. How are you seeing Series A in terms of benchmarking now that the markets have corrected?

HP: It is all over the map. One because of the reasons we talked about that there's a wide diversity of investors that too, because that market correction tends to take a while to flow all the way back up through the plumbing, right. So it instantaneously hits the public markets, and then immediately hits the round right before that, right. So pre IPO companies late stage growth capital, because they can be effectively marked to market even though they're private, right? Like if you're a late stage private company, but you have very well understood revenue numbers, you can effectively just be marked to market against your comps. And that'll happen immediately. And that already happened. Right? It takes a little while to kind of move that back through Series B Series A and through seed. Seed has felt a little bit more insulated. I mean, although you're seeing price corrections there as well, partly because I think people look at seed as an option bet on whether or not the company gets you know, any signal yes or no, right. So TBD, I think we've seen seed valuations hold up, you know, maybe a bit more than we expected even to this point. A and B is getting a bit tricky. And now folks want to say commercial milestones, you're like, Well, guys, we're not there yet. We're still a year off from that right? And then that puts you in this trickier position of needing extension capital, or something else to be able to get you there. Or you'll raise capital. And it'll just be raised at a valuation that was different than what you'd expect it so I think that one, the numbers are all over the place. I think two, they are generally speaking that the trend line is certainly shifting lower. And I think ultimately, that will determine what happens at seed right? In other words, it may be rounds consistently become very, very difficult to raise. So I think founders should expect that it's a trickier price discovery process now, to figure out like, what is the fair price for your startup?

VC: As you look at the venture ecosystem and climate right, from my vantage point, it looks like there's interesting stacks a little different than general tech, but quite a bit of money at the seed, which is common in general tech. But then as you go up the layers, it looks different. In terms of who's who's investing, it could be billionaires, it could be people that really understand a specific vertical. How do these founders think about navigating the series B and beyond in a very niche technology, where there's a lot of education required to the investor?

HP: Great, great question. I think again, it depends on the category. So and it depends on the stage and I'll sort of try to connect the dots on those two things: first off at the seed stage, It's relatively easy and relatively low risk for a wide diversity of funds, including generalist funds and multi stage funds to make seed bets even if they know they're not an expert in that category, right? Because, again, they're playing for optionality. They're playing for the fact that this sector could be something that's interesting, right? So you know, we've been doing climate for north of 15 years, right? Like my partner Paul has been an OG in that category deeply for a long time. I'd invested in Spark raid companies, you know, a dozen years ago, and survived kind of that first wave and into the second wave. Everybody disappeared as soon as it looked like it wasn't lucrative, right, which is the economically rational thing for those people to do. And now I think you've got a new universe of folks who are reentering climate or generals, investors that want to put a toe in the water, right. And we'll see sort of how that turns out. But it's ultimately going to be dependent on are there enough exits and outcomes that justify that and then the wheel continues to turn. But where we sit today, I think there's a great deal of interest at the seed stage primarily because if you're late stage fun, what the heck, we can make a bunch of events and see how it plays out. If you're a general fund, again, climate might be one of things that you've added, right. If you are climate centric enterprise SAS, I think you have a big universe because anybody that does enterprise SAS would look at and say this is just like a vertical enterprise SAS play. Like we did that vertical healthcare SAS play, we'll do a vertical climb that says play. So I think your universe is large. So now you've got, you've got people like Breakthrough Energy, right. You know, you're talking about massive fund size. You got people obviously, like Chris Sacca and the funds that he's raising. You got tons of folks that are out there. There are many billion dollar class funds that are that are dedicated to climate. And that's a big difference between the first climate wave and the new climate wave. And I think a lot of this capital understands what they're doing better, and are more committed to it for the long haul.

VC: Yeah, that's great. That's a huge huge asset for founders building today is different.

HP: But the one thing we can move on but I just do one other parenthetical on that question is that founders need to know and understand the universe of investors that would fund their business as they grow even early in their journey, because those are relationships you should start to nurture and get to know because some of those investors might want to get to know you at the seed round, even if they're not going to write a check. And like we talked about, if you're a startup that has a small universe of customers, you know, there's more pressure on each one of those customers. Same thing holds here if there's a small universe of potential lead investors for your later stage company, then there's more there's more urgency of you know, not raising capital from any one of them or having a bad relationship with any one of them right so that the onus is on you, I think earlier in your journey to know who they are trying to build those relationships get on their radar sooner. Because there are so many fewer of them.

VC: What's most exciting right now to you, like, what's a particular either part of one of these industries that you're pumped on or somebody that you wish the founder or founders started building something for right now, if you weren't doing this, you would be doing that?

HP: Yeah, you know, it's it's funny because you'll hate it. So I'm not going to give you the non answer that is actually the truthful answer. But like, we are so founder, centric in how we think about this. And part of the reason we created wireframe is that and I'm not going to hurt your question. But there are segments that we care about that we think are interesting. And there are other other segments that we are a little bit more skeptical of right for sure. And we could talk about, but I honestly mean this when I say it is that we built wireframe to never be so opinionated. As to miss the extraordinary founder that walks in the door with a slightly offbeat or slightly crazy idea because that is what venture is about at the earliest stages. The single most important thing we could do right as a firm is to always maintain an active open mind to something that might not fit our preordained worldview of how things should look because we are not keepers of you know like the crystal ball, right? We don't know. And I always say like we have a prepared mind, we have a certain point of view, we have an understanding of economics, we have understanding of channels, we know certain markets are tough for certain reasons, but we can't see around corners as well as founders can. And if a founder walks in the door and is looking around the corner in an area that's thematically aligned to us, we always try to maintain a sense of open mindedness and say, wow, like that founder blew me away. We invested in a company that's doing geothermal for commercial and industrial scale, right. We've had some interesting work there at the residential level. And at the utility scale level. We've asked a company that's doing something kind of in the middle for commercial industrial which is really interesting company called dark energy. That's an area that we like, I think the intersection of biology and climate is really interesting, right? And so the intersections of those technologies, I think, are very rich fields to look for new types of startups.

VC: Okay, hot take. What areas are not investable for you? What is overhyped?

HP: Nothing is not investable for us. If the founder, you know, checks the box that I just mentioned, like somebody walks in the door or something and we're motivated then I'd say, Yeah, everything's on the table. But stuff that we have a harder time with, you know, number one, I'd say companies that have like biotech risk for pure commodity returns, who don't have a really good answer for that, right. So what I mean by that is there's some companies that have all the risk of a drug development company, right? I mean, it's incredibly hard. Science, it's incredibly difficult, time consuming, capital intensive. And then they're entering an industry where you're competing, unlike a drug, right, which is going to have IP protection. You know, it's a premium product. You might be entering a total commodity industry, and there's a lot of really great companies in that category. But the ones that end up breaking out are ones that understand the unit economics really well, which we talked about a little earlier, right? They really understand what they're shooting at, and they understand how to scale their technology to a point where they can hit those numbers. I think there's a pretty broad universe of the majority of those companies that are going to struggle quite frankly with making the math work, right. So because you're competing against the price of a commodity. You could have executed perfectly from the bench to a certain scale up to your manufacturing scale, and you still lose the game, because you're contingent upon something that you don't control. So you have to be better as a product. You can't just be scientifically better in a lab. You have to be better as a product in the marketplace. And I think we're gonna get there. I think we're gonna get there on a ton of these types of products. But I'm skeptical about the timeline for many of them right, in other words, are we gonna get there within the next five to seven years? If we make a venture back? Do we think we're gonna get there fast enough? I think TBD on some of those.

VC: Got it. And I know we're kind of running up on our time. So just to kind of close things out. I know there's a lot of gloom and doom right now about where the planet is and certainly other parts of the world. But you know, what gives you a lot of hope. Right now, are there any particular innovations, or any particular parts of your role and your job in your life right now, that give you optimism?

HP: I am inspired and optimistic every day I wake up, and the reason is, is because I spend most of my days having conversations with founders telling me what they're working on. And obviously we can only invest in a very small set of those things. But just the sheer ingenuity, the some of them are just crazy, right? Like, like absolutely science fiction. Some of them you know, we're like, I don't think that's going to work. But it's awesome that somebody is working on that. I would say that the momentum around interest, the talent that we talked about before that wants to come in, I think the recognition globally that like, we don't have a choice. So let's get to work. You could get up every day and be upset about it. And I get that, or you can do something about it. And we choose the latter. And I think aligning ourselves with founders and those founders aligning themselves with people that want to join their companies or start other companies that flow is stronger than it has ever been before. And so again, the macro market is certainly in a tough spot, right? And we don't know how long it's gonna last. We don't know how deep it's gonna go. We're guiding founders that we talk to, on a daily basis to be prepared to weather this storm but startups are 10 year journeys, right? The greatest ones are 10 years or longer. It's gonna take you a while. We can't and you can't, as a founder, build or worry about temporary market gyrations that are out of your control. You just got to plan for that as if it's another constraint. It's a constraint on my system. Maybe my evaluations will be adjusted. Maybe it changes how much money I raise, when I raise money. Maybe it changes my milestones, maybe it changes certain parts of my business plan. But it doesn't change. My fundamental reason for being here doesn't change my motivation, it doesn't change my goals, right? It just means like Hey, I got to work around these obstacles. And I think the best founders view it that way. And everybody's seen all the stories about how many extraordinary companies were founded immediately in the wake of 2008-2009, do I won't repeat all that stuff. But it's true. It's true. It's really true. So that's what I think gives me hope and optimism every single day.

VC: Fantastic. Harsh. Thanks so much. Today, I'm really excited to share this episode with all the founders out there. Well that's it for this week's episode of climb by VSC.

Thank you so much for reading our latest update from VSC Ventures Fund I. We're in the early days of our long and healthy partnership with all of you, so please reach out to us with additional questions on anything above. Thank you again for your support for our vision and our fund!

Vijay Chattha & Jay Kapoor

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