5 Things I Need to See Before Making A VC Investment: With Tim Wilson, Partner at Artiman Ventures

“Founding and managing startups is hard. There are inevitably going to be setbacks. We try to assess the founding leadership, and one core question we pose is: “Do these people have the skills and talent in order to execute and pivot, as needed, around the pitfalls that are going to happen over the lifetime of these companies?”

I had the great pleasure to speak with Tim Wilson. Wilson is a partner at Artiman Ventures, an early-stage, sector-agnostic venture fund known for making white-space investments in startup companies that have the potential to create or disrupt multi-billion-dollar markets. Wilson and his partners are former entrepreneurs who bring empathy, curiosity, experience and a passion to solve big problems that matter to the table for their portfolio companies. Artiman was founded in 2001 and have more than $1 billion under management today.

Yitzi: Thank you so much for joining us! What is your “backstory”?

I’m a failed physicist by training. On my way to a PhD degree, when I was sitting in a lab and saying, “I can’t do this for a living,” I ended up deciding to go to business school. My first foray into business was starting a frozen yogurt company, where I got a taste of raising money and running a company. But, I recognized that I missed the technology aspect, so I joined AT&T and spent 14 years there, taking every job I could think of. I rotated around sales, marketing and lab operations, both in the U.S. and Australia.

I left AT&T in 1997 to join a startup in San Francisco called Digital Island that developed a global e-business delivery network. We launched the company at a time that the market was fairly crazy prior to the crash. We went on to raise almost a billion dollars in a combination of debt, equity, and public and private financing. We never had positive-growth margins, and our peak market-cap valuation was $19 billion.

When the crash happened in 2000, we ended up selling Digital Island to Cable & Wireless Worldwide for $340 million and that phase launched the beginning of my investor experience. One of the VPs on our board asked if I would be a venture capitalist, so I joined the ranks of the VC community in 2001, starting with a firm called Partech Ventures. I spent 10 years with Partech, and now I’ve been with Artiman Ventures for seven years.

Yitzi: Can you share a story of your most successful VC investment? What was its lesson?

My most successful exit is a company called InvenSense, which was acquired by TDK for $1.3B last December. I co-invested with Artiman Ventures in the Series A in 2004. Ultimately, that company went public and returned more than 20 times its money on the investment. It’s just a phenomenal story. The founder and a remarkable team set out to invent and market a new product, and they ultimately succeeded in getting it into all the major phones that people carry around the world.

The original product was a motion sensor. It was a gyro and an accelerometer that detects the motion of your cellphone and enables various applications — from the stabilization of your camera to playing games. InvenSense also enabled the Nintendo motion Wii controller, for example, so if you throw a baseball or swing your bat as part of a gaming experience, all that’s driven by InvenSense’s motion-control technology. Today, its MotionTracking™ sensor system on chip (SoC) and sound solutions address the needs of many mass-market consumer applications. Its technology can be found in smartphones, tablets, gaming devices and remote controls for Smart TVs.

One of the ultimate challenges of the company was the ecosystem for the cellphone manufacturers themselves started to collapse into, really, two end-customers, Samsung and Apple. This consolidation resulted in a brutal marketplace, and there were constantly new competitors coming into market trying to knock them off. Despite this, InvenSense did extremely well over its years. The core lesson is really one of strategic planning and strategy. We knew as the industry started to collapse, and the buyers became more and more powerful, that it’s vital to think through a diversification strategy to avoid dependence on just a few large customers who dictate your future.

Yitzi: Can you share a story of a VC funding failure of yours? What was its lesson?

I’m going to mark my biggest failure as a company called Nutrinsic that provided nutrition solutions through the upcycling of various waste streams. Our first production facility was located in a corn field in the middle of Ohio. We were processing the wastewater of a large brewery, and turning that beer wastewater into food for animals.

The failure was caused by fact that we didn’t design the plant properly before going into production. Whether you’re making protein from beer waste water or building a customer support center, you need to think through how to control the process. The lesson from it is the need to design the control loop correctly. At the brewery, we had built a colony of bacteria that fed on the organic material in the beer waster. Unfortunately, the actual amount of food we got from the brewery was much more variable than what we could handle, sometimes underfeeding the colony and sometimes overfeeding it. It had other challenges that we didn’t see in testing. For example, one of the techs left a spigot open and dumped pure beer down the waste stream. Our bacteria essentially got drunk and died of alcohol poisoning.

Restarting that colony wasn’t easy. We lost lots of time and money during a period that was supposed to take us into revenue. We tried to reengineer the plant, but the company simply ran out of money, and we ended up selling the technology to a China-based company. The core technology is active and productive today and it’s cleaning wastewater in China. Unfortunately, I own very little of that in the end given the mishaps in the United States’ operation.

The lessons are two-fold. Firstly, I should have done more diligence on the depth of the engineering, and I didn’t bring the right resources to bear when I made my investment. Secondly, I was depending on the capability of the CEO at the time. We should have done more due diligence on his motivations. He ended up deciding he was better off as a grandfather and resigned in the middle of the troubleshooting process.

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

Generally, I really believe that to survive or to thrive as a venture capitalist, you need to try hard not to have any regrets [laughs]. I try not to think about: “I could have, or I should have.” I just aim to make the best possible decisions at the time, and then I have to live with the decisions that I make.

That said, I do regret not investing in Iridigm Display Corporation when they approached me. The company developed a revolutionary new reflective flat-panel display for the mobile-device market. I had a look at that company in 2004. The company had core expertise in the display industry and MEMS technology which is the method they used to modulate light. I decided to pass on the company, and within a couple of weeks another VC invested. I can’t recall whom. Then two weeks after that, the company was sold to Qualcomm for $170 million. From an ROI-perspective, I had concluded incorrectly that that company wasn’t worth what they were asking for.

I could have returned a phenomenal ROI in a matter of about six weeks. I only take solace in the fact that after the acquisition, that technology really never saw the light of day. I hear they invested some amount of money to try to commercialize that core technology, but they were never able to do so. But, from a pure financial-return perspective, I would have loved to have that investment and return in my history.

The lesson is that not all companies that get acquired are purchased for the reasons that you think they’ll be acquired for. So, open up your mind to other value from intellectual property and assets that are there as part of a deal that can be monetized when you’re evaluating. I took note of that for sure.

Yitzi: Which person or which company do you most admire and why?

The person I admire most is one of the greatest geeks who ever lived: Nikola Tesla. As a failed physicist, I deeply admire his ability to invent so many things that have positively impacted humanity for the better. More than 100 years ago, the Serbian-American inventor started inventing things that have changed the world. For example, in a time when the majority of the world was still lit by candle power, Tesla invented an electrical system known as alternating current that, to this day, powers nearly every home on the planet. While everyone thinks of Edison as inventing the light bulb, he simply figured out how to sell it, improving on ideas of 22 other men who pioneered the light bulb before him, including Telsa. Other inventions Tesla developed include wireless communications, radar, an AC induction motor, remote control, and he’s rumored to be the first person to record radio waves from outer space. Unfortunately, his business acumen was less than stellar, and he died broke — in many cases without the credit he deserved.

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

One of the companies that I’m currently involved with in my role as CEO has an aspirational goal to reduce carbon dioxide on the planet. The way we intend to do that is building a solid-state device that replaces every compressor that’s being used in air-conditioning in the world, and do it with a more efficient device. The company is called Silniva Inc.

Collectively, we consume about 18 percent of our energy around the world to keep us cool and our food cold. As global warming happens, that challenge is only going to get harder. I feel like we’re going to give a go at making a real dent in the consumption of electricity globally with Silniva. This technology will, I hope, in years end up showing up in your car, helping your car go longer, and keeping you comfortable.

Like Nutrinsic, I’ve always been interested in how we feed ourselves and how we prevent global warming, and leverage technology to do both. I’ve been involved in trying to recover unused materials that are available in waste streams and upcycle those into food. I’ve also been involved, in this case, trying to use electricity more efficiently to help solve a very large, global problem that is related to global warming.

Yitzi: What are your “5 things you need to see before making a VC investment” and why. Please share a story or example for each.

1. Mental toughness and capacity of founding team’s leadership

Founding and managing startups is hard. There are inevitably going to be setbacks. We try to assess the founding leadership, and one core question we pose is: “Do these people have the skills and talent in order to execute and pivot, as needed, around the pitfalls that are going to happen over the lifetime of these companies?”

Moving or replacing the founding team is expensive and very difficult. One of the most important criteria we have is that, more or less, we have to get along with the founding team because we want to work with them for years in helping them build their company.

One example to bring this to life is a portfolio company called CardioDx, based in Redwood City. They’ve pioneered a blood test that you can get administered to identify if patients have had a heart-stress event. Think about this as if you go to a doctor’s office and say, “I think I’ve had some heart palpitations or fluttering.” With CardioDx, health technicians can do a test and say, “Yes, you’ve got a blocked artery.” Or, “You’ve got other indications of heart challenges.” Or, “You’re free to go home and no issue.”

The founding team did a yeoman’s job getting that established. That test did not exist prior to CardioDx. They had to go through and get validation from the medical community and insurance agencies. Even if you have a great diagnostic, it doesn’t mean that you get paid for it. They did a lot of work with the Veterans Hospital Administration to show it added value and get reimbursement so they could build the company. To be successful in the end, they needed to recruit a new CEO, Khush Mehta, in 2016. He’s been doing a phenomenal job building on the foundation the founders created, and he’s brought a focus and shape to that company that has just changed its profile. It’s now doing exceptionally well.

2. Opportunity to create or disrupt a $10 billion market

The second thing we look for is: can we imagine the founding team creating or disrupting a $10 billion market? If they’re actually disrupting one, it’s a little bit easier to imagine because the market already exists. To be successful, the startup needs to introduce a much better value proposition in that market.

A solid example of this is a portfolio company of ours called Niron Magnetics, based in Minneapolis. The company produces high-performance, sustainable magnets from non-rare Earth materials. Some pundits forecast the permanent magnet market will be worth $22.6 billion by 2021. That global market is massive because magnets are used in motors and generators worldwide. If we build a better magnet, that market will be disrupted because we’ll have a stronger magnet that’s readily available so the company and its partners can supply production outside the control zone of any one country and its natural resources.

3. The product or innovation creates an unfair advantage

The third thing we look for is: what’s the unfair advantage? The unfair advantages, in many cases, in our portfolio are driven by science and technology. It’s the algorithms, materials, architectures, designs and insights that allow a founding team to attack the market and hopefully disrupt or create it. There are also times that the market innovation is not technology-driven, but instead it’s idea-driven, or it’s a first-mover type of advantage. For example, in India, one of our market-driven innovations is a company called mSupply, based in Bangalore. What mSupply is solving for is the Indian construction industry which is fairly challenged, corruption-wise, and it’s created the largest B2B commerce marketplace for construction and interior décor and design.

The ability for developers or builders to predict when materials would show up on site was nearly impossible prior to mSupply. What they built was a three-way marketplace to build trust into that Indian ecosystem. One market player is the builder who needs materials and is in need of acquiring steel, concrete, paint, and whatever other supplies. The other part of the marketplace is the supplier. The suppliers, as in any market, get rated on their ability to price well and to supply on-time. The third element of the marketplace are the financiers who watch materials move from supplier to builder and can release funds according to that. mSupply is a shining example of a marketplace where the company is solving a problem of trust in a country where trust hasn’t always been transparent; leading to an unfair advantage.

4. Alignment with our investment strategy

The fourth factor we evaluate against is alignment with our investment strategy. We are an early-stage venture capital firm. We typically invest two to six million dollars in startups, and we’d like to see ownerships that are sufficient for us to realize a return eight years later. We are fairly disciplined about when we get involved with a portfolio company.

Our investment strategy means that when we see a great company we’d like to invest in, but the valuation has gotten beyond where we are comfortable with, we give them our best wishes for success, but pass. Then, we challenge ourselves to figure out how we could have intercepted that company earlier on in their journey to improve our discovery in future.

For example, I just passed on a deal where a valuation got beyond where I’m comfortable with investing. Although, I loved the technology and the core team, and it was in the robotic space that I’m passionate about, we decided to pass on the investment and wished them well.

5. Ability to energize others who are external to company

The last thing we need to see is the ability to energize others outside of the core team and investors, and to do so despite challenges and pivots. I look at that as a trait of the founders, but also as a separate metric. Founders can often be fantastic within the company, but to build and scale it, they need to be able to influence other people like prospective employees, suppliers, partners, and advisors who want to help. This quality of founders who are able to excite and energize others indicates a healthy ecosystem around the company, and a reason for us to get engaged with them.

A company in our portfolio called Prysm is a phenomenal example of how to energize other companies to help drive success. Early on, they had co-opted some very large companies to help them with taking on CapEx risk of manufacturing capital. Prysm invented Laser Phosphor Display (LPD) technology to create breathtakingly beautiful and versatile video walls to deliver immersive experiences. For example, they installed a 120-foot display with 50 million pixels in Barry Diller’s headquarters in New York. As the business and LCD market matured, it became clear they needed to pivot, and they introduced smaller screens in the boardroom, desktops and tablets and focused more on software. It was a fundamental pivot to design and sell solutions, and required a total rebuild of its engineering and sales-force teams.

Yitzi: 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. :-)

Right now, I want to meet the CEO of Daimler, Dr. Dieter Zetsche. The reason is two-fold.

First, the car industry is going through a massive transformation. From ownership to shared models. It’s going through a transition from the combustion engine to possibly hybrid and battery technology, and also evolution of being driven by humans to being driven by software. I would love to learn from Dr. Zetche and others like him how they are thinking about re-engineering their company for the next five years.

The second thing that’s related is that automotive is a target of mine, as I mentioned earlier. I am very passionate about helping the world reinvent transportation. For example, for our core technology at Silniva we think would help with the air-conditioning side of this in terms of keeping people comfortable with lower energy costs. We also can run that same device in a different way to generate power off of hybrid cars, and perhaps add range and power to those vehicles. I think it’s a conversation that I’d love to have both ways on learning from him of the challenges they’re facing, but also possibly contributing to the capabilities of their fleet and extending and conserving fuel for all of us and our grandchildren.

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