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Eugene Zhang of TSVC: 5 Things I Need To See Before Making A VC Investment

An Interview with Jason Hartman

Investing in early-stage naturally involves risk. When companies fail, we ask ourselves whether we made a correct decision and got unlucky or whether we made a wrong decision. On one occasion, I remember we waived one of our investing criteria — we always require that all founders be full-time, but in this case, a very illustrious founder had other obligations, and we invested anyway. The company failed, reinforcing my belief that being a “founder” is a full-time job; anything less than full-time is an advisor. Advisors can be valuable, but they aren’t founders, and companies who confuse the two are starting on the wrong foot.

As part of our series about “5 Things I Need To See Before Making A VC Investment” I had the pleasure of interviewing Eugene Zhang.

Eugene Zhang is the founding partner at TSVC, the leading early-stage venture capital fund in Silicon Valley. His investment focus is in emerging technologies and FinTech, and has led investments in over 70 startups including ZOOM, Quanergy, Lex Machina, Trusper, TrustGo, Carta, Gingko Bioworks, Gaatu, EquityZen,17Zuoye and GigaDevice. He has also served on multiple boards including Gaatu and Tsing Hua Entrepreneur & Executive Club (TEEC).

Eugene holds a Master of Science in Communications Engineering from Syracuse University, and a Bachelor and Master of Science in Electrical Engineering from Tsinghua University, Beijing.

Thank you so much for joining us in this interview series! Before we dig in, our readers would like to get to know you a bit. Can you please share with us the “backstory” behind what brought you to this specific career path?

Like many new generation immigrants from China, I was attracted to Silicon Valley in the early 90s by its job opportunities. I joined SUN Microsystems in 1992 and joined a co-worker’s side project called Vera. Years later, Synopsys acquired Vera for $68M. That was my first direct taste of the Silicon Valley magic — It’s possible to start from an idea, work hard at it, and be rewarded. Silicon Valley stories could happen to you.

Is there a particular book that made a significant impact on you? Can you share a story or explain why it resonated with you so much?

The book is Andy Grove’s “Only the Paranoid Survive.” The biggest takeaway from the book is always to anticipate what could go wrong and take action to avoid it relentlessly. My personal experience of 6 years at Juniper Networks from its early days was a good example. In 1996 I left red hot Cisco and joined a little startup, Juniper Networks. Facing numerous competitors, from giants to well-funded startups, Juniper had to ship its product, a hardware system, on time as promised to its nervous waiting customers. Juniper was under tremendous pressure to ensure the whole system, including chip components, boards, and software, worked by the deadline. The first chip tapeout had to work as there was no time to re-tapeout. The team had to do all possible to uncover potential problems and exhaust all testing. I asked Pradeep Sindhu, the main founder, how Juniper could be successful. I vividly remember his answer, “we have a good shot at it if we execute.” Execute it did: the product worked as promised, and Juniper went public in 3 years and reached a market cap of over $70B with huge customer successes.

Do you have a favorite “Life Lesson Quote”? Do you have a story about how that was relevant in your life or your work?

“We have a good shot at it.” We are dealing with incomplete information; that’s the nature of the venture capital business.

How do you define “Leadership”? Can you explain what you mean or give an example?

Build a culture that you are living by and that others follow willingly. As an example: everyone in our firm, including myself as the founding partner, participates in the firm’s economics based on the same contribution formula. If someone else in the firm does the work on a deal and I don’t, that person gets the benefit, unlike many VC firms where the senior partners take most of the economics.

How have you used your success to bring goodness to the world?

Our work with entrepreneurs — both those we invest in and those we don’t — is huge leverage; the companies we work with create tremendous good in the world. We have set up the “TSVC Giving Fund” with millions of dollars. So far, we have donated to over ten non-profit organizations for causes including better education, academic excellence, science and technology research, civil rights, etc.

Ok, thank you for that. Let’s now jump to the main part of our discussion. The United States is currently facing a very important self-reckoning about race, diversity, equality and inclusion. This is of course a huge topic. But briefly, can you share a few things that need to be done on a broader societal level to expand VC opportunities for women, minorities, and people of color?

My dream is a purely merit-based system. We are far from that reality today, but that should be the goal for all races. Here at TSVC, we’ve invested in dozens of women founders, AAPI founders, immigrant founders, and great entrepreneurs from all backgrounds. We often find the best opportunity to back founders others have underestimated or overlooked.

Can you share a story with us about your most successful Angel or VC investment? What was its lesson?

Zoom in 2011 as a seed investor. Other funds had passed on the opportunity — probably because Eric Yuan, an immigrant from China, didn’t fit the template of what they thought a founder “should” look like. TSVC knew his potential and backed him — our fund inceted and many of our limited partners also invested individually. More and more startups are started by technical founders, and more and more immigrant Chinese are starting companies.

Can you share a story of an Angel or VC funding failure of yours? What was its lesson?

Investing in early-stage naturally involves risk. When companies fail, we ask ourselves whether we made a correct decision and got unlucky or whether we made a wrong decision. On one occasion, I remember we waived one of our investing criteria — we always require that all founders be full-time, but in this case, a very illustrious founder had other obligations, and we invested anyway. The company failed, reinforcing my belief that being a “founder” is a full-time job; anything less than full-time is an advisor. Advisors can be valuable, but they aren’t founders, and companies who confuse the two are starting on the wrong foot.

Can you share a story with us about a problem that one of your portfolio companies encountered and how you helped to correct the problem? We’d love to hear the details and what its lesson was.

Many of our founders are technical, and sometimes they are not the best presenters of their company vision in the early days. Our message to them is, “you have to be good at this, communicating with audiences and articulating company vision, and we are here to help you.” We are not as deep in the subject matter as the founders, but for VCs we are highly technical, which gives us an ability to understand where the company is coming from and help them articulate for a more general audience. For example, we spent hours and hours working with Dr. Dr. Zheng Xu (that’s not a typo, he has two PhDs :), a serial entrepreneur, to polish his presentation.

Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn from that story?

Usually, it’s in the category of underestimating the learning capabilities of the founder. It’s hard, but we need to be better at it. One such company is GagaDevice, where the founder had not established an executive or entrepreneurial track record before surface. GagaDevice later became a unicorn. It’s essential to spend time learning from a founder.

Super. Here is the main question of this interview. What are your “5 things I need to see before making a VC investment” and why. Please share a story or example for each.

Our internal decision framework includes “the three pillars”: team, market potential, and technology/product. We evaluate each of the three pillars independently — often, we have a different team member within TSVC look at one vs. another — and also from first principles, not based on what other investors may have evaluated.I know you asked for five things, and I mentioned three. The math does work, though: in the spirit of “location, location, location” being the three most important factors in real estate, we think “team, team, team” count three times. So given that, I’d say our five things are “team, team, team; market potential; and product/technology.”

You are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. :-)

Do 1% more than others, Be 1% better than others, and keep at it.

We are very blessed that some of the biggest names in Business, VC funding, Sports, and Entertainment read this column. Is there a person in the world, or in the US whom you would love to have a private breakfast or lunch with, and why? He or she might see this. :-)

Netflix co-founder Reed Hastings. His book “No Rule Rules” is inspiring. Startups can succeed to some degree for many reasons, including timing and luck. However, building a long-lasting legendary company takes more than timing and luck; it starts from a firm’s culture, especially created by the founders. Transparency and ownership are two critical components of the Netflix culture and are in the company’s DNA. I can personally relate to this observation. At TSVC, we have had our share of luck, with 9 unicorns over the past 10 years. More importantly, our culture is reflected in our “T.E.D.” internal management system, which reflects TSVC’s culture and values. The acronym is T=transparency, E=expertise, D=dynamic: we share information transparently within the firm, including details many firms keep secret; we rely on experts, including our eight in-house PhDs and their extensive network; and we dynamically learn and un-learn to adapt to changing situations. Venture today looks a lot different than it did when we started twelve years ago, and yet I feel like we’re better at it now than we have ever been — we’re constantly assessing where to reference our experience and where to conclude that the world has changed. That’s also what keeps it interesting every day.

This was really meaningful! Thank you so much for your time.

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Jason Hartman

Jason Hartman

Author | Speaker | Financial Guru | Podcast Rockstar