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Strategy Session: Vertex US On Early-Stage Investing

Strategy Session is a feature for Crunchbase News where we ask venture capital firms five questions about their investment strategies.

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Vertex US is taking a unique approach to early-stage investments by investing early and often first.

The firm intentionally makes a select number of investments each year to be true partners to startups from Day One to 100 and beyond.

The Palo Alto-based firm is now investing from its second fund, the $150 million Vertex US Fund II, in enterprise tech investments. Upsolver’s $13.3 million Series A was the company’s first lead funding amid the global pandemic. Upsolver manages, integrates and structures streaming data for analysis at unprecedented ease.

We spoke with Vertex’s General Partner Jonathan Heiliger and Partner Sandeep Bhadra about the firm’s friendly approach to investing.

Your approach to early-stage investments is unique–investing early and often first. How did you settle on that thesis?

Heiliger: Before starting Vertex, we collectively had made more than 40 angel investments. We enjoy seeing, picking, winning and working with companies. In our former roles, we thought focus was an important ingredient. On our website, you don’t see the word “focus,” but you do see “no bullshit.” Early on, Sandeep said make a few investments and make them count.

How do you like to work with founders?

Heiliger: Our approach to investing is that while everyone touts being founder-friendly or been a founder before, in our case, our three partners were actually founders. We think that not only sets us apart from other investors by virtue of us being founders, we also have empathy. We end up being a couch for them to talk. You have to stretch your perception of what is possible and take the leap with the founder. Being able to respond quickly and interactively is important.

Bhadra: It’s also how we operate and use our time. Time is a constraint for any investor, and our portfolio is concentrated. We might do seven or eight Series A and seven or eight seed investments. We start bigger and expect to have some not make it to next term. Each of us takes up one to two new projects each year. We don’t treat investments as call options. Even in seed investments, we spend time with founders and do it with intention.

Among the enterprise tech investments you are looking at right now, what area or sector is attractive to you?

Bhadra: We are still in the early innings of moving to the cloud, the adoption of enterprise software, and formalization of work through software. IT was a department that would keep blinking machines working inside the broom closet. Then the cloud happened, and five years ago we all thought super artificial intelligence was going to take our jobs. However, there is a happy medium that software will work as a handmaid to humans. There is a symbiotic relationship. You can see acceleration through the pandemic that brought forward a digitalization strategy. We are now in a weird place where the market has come to us. We are fortunate to live through a time where work is being transformed through technology.

Heiliger: It’s the move to development and operations. To enterprises, this is new, interesting or novel, but they don’t have the bandwidth to build them, so they have to buy it. Just as businesses outsourced to places like AWS, this is another level, like doing it through tokenization. That is a trend we are betting on as the line of infrastructure goes from raw to a higher and higher level of things.

You are now working on your second fund. What lessons did you learn from your first fund that you are applying here?

Heiliger: Lots. It is worth repeating that we believed in the founder vision early on. We catch ourselves all the time. We get in the weeds all the time, and need to think where the company will be in three to five years and dream that dream. You also have to consider how to remain curious, especially now that there are no serendipitous conversations in the office. Now you have to be creative with the tools, be adaptive and continue to dig. During the first fund, we spent a lot of time putting our shingle out in the world, so deal flow was slow, and in fund two, we hit it hard and fast. The second fund closed in February 2019, and we made nine investments that year because we were primed and ready.

Vertex has seen several companies exit. While it’s difficult to pick a favorite, is there one that you were most excited to see exit?

Heiliger: SpaceIQ’s exit to WeWork (acquisition in 2019). We incubated with the founder, helped create the idea and set up interviews to validate. The idea is doing seed planning for offices used to be Post-its on a blueprint. They modernized it to become something you could drag and drop. What was going on under the hood was more advanced. Various teams grow and shrink at different rates, so you need to adjust planning, and they built this business, and it started going well. WeWork approached them to combine, and it was in the press pretty heavily. We literally closed the acquisition a week prior to the whole thing unraveling. We had coffee recently with the founders. It was kind of sad, because it went from a great marriage to not.

Illustration: Dom Guzman

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