12 Questions for Ryan Floyd and Tae Hea Nham
June / July 2006
Volume 4 Number 3
Storm Ventures was born in 2000, amid the frenzy of dotcom investments in the tech industry. From its perch in Menlo Park, Calif., the venture capital firm has focused on finding young companies in need of seed money. Ryan Floyd and Tae Hea Nham are veteran investors who have turned their attention from optical networking when that field was hot to consumer technology companies today. One of their biggest investment hits was Airespace, a San Jose company that developed the software infrastructure for making wireless video happen on cell phones. Storm has done seven deals with its third fund, which raised $220 million, and it is still focused on small deals in the seed round stage, in contrast to many larger VCs focused on large late-stage deals.
How many chip deals do you see today?
Ryan Floyd: It's fewer than it used to be. You don't see a lot of digital logic chip company deals, where you hire 80 people and raise $50 million. The company I funded in January is making a new kind of memory cell, but it is only making a component in a chip that could be made by another company. It's using an intellectual property model, where it licenses technology. That's more common.
Tae HAE Nham: The semiconductor deals reflect what is happening with globalization. A lot of new companies are based in Asia. It's pretty hard for a U.S. semiconductor company to compete against a new one in Asia. That's where the customers are. If the company is based in the U.S., it will likely have a lot of engineers in Asia.
There have been a lot of nanotechnology startups in the chip area. What do you think of those?
Floyd: Most of them are coming from the view of an applied natural science. We haven't done a lot of work on new materials. The profile for these companies is almost like a biotech company, with a long research phase.
What's hot in terms of investments in Silicon Valley? You get to see so many deals. What's the pattern?
Nham: The consumer internet, or Web 2.0. There is so much opportunity there. A few years ago, you could create a company with a very small amount of money and get traction. When you see that kind of activity, it attracts high investment returns and as a result it attracts a lot of money. That's a contrast to chip deals that require a large amount of money and a long time for the return.
Floyd: The most obvious one you see is where deals are getting funded and where you're surprised, when there are at least four or five competitors already. It's consumer web that is frothy now. I think what is fairly interesting is that the spectrum of opportunities that venture capitalists are willing to look at today and is very broad. Go back five or ten years ago. It was fairly well constrained. Defined business models, intellectual property and software. Today there is no boundary condition in terms of what venture investors are willing to look at. I ran into one investor who was looking at a company making composite materials for a lightweight jet. For a technology investor, it's a big market and a big opportunity and not something someone was willing to look at five years ago.
Just like the opportunity in solar?
Floyd: Yes, like solar, clean technology. That's very hot today. Lots of people are looking at clean tech deals. Environmental deals were hot in the late 1980s and early 1990s. Then it cooled off. SunPower has done phenomenally well. And when someone does phenomenally well, you find venture investors following the money. Geographic focus has changed and broadened as well. The flight to Bangalore or the flight to Shanghai is common now. This is where Silicon Valley VCs are spending a lot of their time. More international investing is very hot right now. If a team has a development group in Eastern Europe somewhere, that is hot. People are looking for low-cost, good quality engineers. The other is exit factors such as Skype.
What do you conclude about the state of innovation?
Floyd: I think it's as good as ever. There are lots of things going on. We're seeing an awful lot of non-technology innovations. We still see new technologies. But we see new business models, new services, new applications.
If there were areas that were once hot and have cooled, what would they be?
Floyd: Optical cooled off after 2001. Storage was way hot in 2002 and 2003. Big storage projects. Cisco funded Andiamo. We had a company called Sinera. Now it's more difficult. Storage companies are executing now and it's a little more difficult to have a startup.
What are your goals?
NHAM: With early stage investors, we are trying to surf the tidal wave. We tend to be a little too early rather than late. I'm not saying that's a better mistake. No one can be perfect all of the time. With early stage companies, you have to guess where technology and markets will be in a few years.
Floyd: What we're pretty good at is predicting technology disruption. For us, it can be very painful to be wrong if we're off by a couple of years. The best example of catching the wave just right is Airespace. We incubated the idea. It was doing a wireless networking switch. WiFi wireless networking had barely started. We had the idea for doing enterprise-class wireless networks. It hadn't taken off yet in a big way. So you could manage it and control it. Most of the investors thought we were nuts. Customers even told us we were nuts. They said it won't work, not going to happen. We almost shut the company down in the winter of 2001. We persevered, used some good connections in Samsung and convinced other investors to come in that spring. We caught the wave perfectly. I would like to say it was our insight and the team was great. But a lot of it was market timing. When we first started it, people thought we were nuts. Then that June there were four or five others starting up.
If you are worried about a bubble, any bubble, what is it?
FLOYD: I think there are always going to be bubbles. With free-flowing capital, that's the reality.
NHAM: It's just human nature to take the last two data points and draw a line for a trend. That's psychology.
What's the area of concern?
FLOYD: Right now, you see all these social networking sites. There is a bubble with the mass profusion. At the same time, they are all trying to approach things slightly differently. Will each niche become large? These companies are not requiring huge amounts of capital, and that's a good thing. If you have 20 startups that each require $20 million, that's different than if they required only $5 million.
What can you say about the pace of getting deals done?
FLOYD: Deals are relatively fast. It's not like 2000, and it's not as bad as 2002. In 2000, it was measured in hours. In 2002, it felt like years. Now it takes weeks to do a deal where you have to do due diligence. A lot of it depends on the type. We don't see the ludicrous early stage valuations anymore where a startup is worth $100 million. You still have enough time to get the due diligence done.
What is the most common mistake you see as entrepreneurs seek money?
NHAM The most common mistake is when the entrepreneurs don't explain why the investment is a great one in the first five slides. You assume you only have time to do five slides. It has to be compelling. People react out of fear and greed. The first five slides are enough to satisfy the greed. Then the next 10 slides address the fear. People like an idea but then they see how it might fail.
FLOYD: What bothers me the most is when entrepreneurs look at us as just money. We are just investors. We're going to be partners for a long time, six years or seven years. That's a long time. Putting off bad news is also not the best approach.
What kind of advice do you give entrepreneurs?
NHAM: If it is something where we want to pursue due diligence, that's a big decision. There is only so much time where we can address the opportunities and the risks. We don't have the time. Often entrepreneurs also underestimate how long it takes to get to cash flow positive. Often it can take five years.
Dean Takahashi, who conducted this interview, is a reporter at the San Jose Mercury News.
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