We recently had a conversation with Chirag Chotalia, partner at Threshold Ventures, exploring what makes Threshold unique, the importance his network plays in the firm’s growth and ideas for the future.
Let’s start with a quick intro to Threshold Ventures
The core focus for Threshold is finding great entrepreneurs early in their evolution. We typically invest at Series A (although we also make seed investments on occasion), and we closely work with these entrepreneurs. We tend to write lead checks and take board seats, and our team consists of five investing partners. We each make two or three investments a year. The fact that we have a pretty concentrated model is a definite differentiator. There aren’t many funds that focus exclusively on the stage that we do. Furthermore, we do it with an eye towards ownership, board leadership, and rolling up our sleeves to work closely with our portfolio companies. We ultimately think that venture doesn’t scale. We derive the most joy from spending time with our portfolio companies and founders, and we’ve found that you can’t scale the level of high-quality advice and support we commit to giving founders.
Another thing we’ve noticed is that there’s a magic number to group psychology where you get people to be their full selves, and we found that number to be around five to seven. Five to seven partners doing two or three deals a year is what we’ve found as a sustainable pace to provide the amount of attention that our portfolio companies deserve.
From a sector perspective, we’re a ‘generalist firm, but I’d say we skew heavily on three sectors: enterprise software, healthcare, and consumer.
I’ve observed that at larger firms, investors work in silos – you have the consumer person, the healthcare person, and the enterprise person. At Threshold it’s different. We love it when a company touches multiple areas because that allows us to collaboratively work together. A great example would be the rise in consumer healthcare companies we work with. My partner, Emily, who spent a bunch of time in healthcare, spends more time thinking about the payer-provider side of the equation. I spend a lot of time on the consumer-side, thinking through acquisition strategies, brand, and how to maximize consumer LTV over time. I think the founders we work with end up benefiting from this unique/more multifaceted perspective.
We also have the ability to move quickly – which I think is becoming even more important in today’s competitive investment market.
How would you describe your network development overall?
I’d say networking is the life-blood of what we do. We are in the business of finding great people to fund, and there are broadly two ways that people do it.
- There are people that tend to be very thematic, which I think is important. It’s about knowing, ‘Here are all of the most important people in this area.’ Whether it’s angel investors or industry experts that are in a specific vertical, it’s building relationships with them. That’s a big help when you need to go really deep in a sector.
- There’s also the generalist network approach. You might think, ‘Hey, there are just a handful of seed investors that are phenomenal co-investors’, or ‘There are companies that seem to have these great founders that build the next generation of companies.’ And, from there, get to know people at those companies so they can give you a heads up when they or one of their colleagues is going to do something interesting.
I think, irrespective of whether or not you take a more generalist or thematic approach, the common denominator is people and networking. In our business, it is most important to make sure we have a broad and deep network in the areas that we care about. When we do, we can see the right set of companies when we’re evaluating investments.
How would you say your network development efforts flow into other key elements of your work, like deal sourcing, diligence, and portfolio support?
A few examples come to mind. Getting on a call with a person once a month and hearing about the most interesting companies that they’ve invested in gives me a significant heads up for interesting things that are still in a very early stage. They’re not quite ready for a full seed round or for series A, but should be put on the radar for relationship building.
Processes tend to move quite quickly once somebody says, ‘I’m gonna raise my hand and kick off a round of fundraising.’ The ability to get to know that founder before the actual official fundraising process begins gives us (and the founder) a pretty substantial advantage: we’re not doing all of our work in a one or two week period. If, for example, you were entering into a 10-year relationship – you would never do that in any other aspect of your life without vetting the person, getting to know them better, or gathering some information about them.
Occasionally we do meet a founder in fundraising mode that we don’t have an existing relationship with, but it’s preferred to know them before this stage. I think it’s great for the founder because they have enough time to vet whether or not the investor will be a good fit. They can do the reciprocal due diligence and not feel confined to the pressure cooker of a fast-moving funding process.
We maintain a really wide network of executives that may work at larger companies but are maybe looking to find the next small company to help scale. We have a talent partner who spends all her time making sure that we have a great network of potential “C” level executives so that when our companies scale and need that kind of talent, we’re not starting from scratch. Perhaps that VP of sales or that CMO might not be a great fit for what that specific series A company is looking for, but they’ve almost certainly worked with some great people that might be ready to make a jump. Often the best candidates come not because they’re actively looking for a job, but because they’re passive lookers, and you’re able to nudge them in the right way.
Are there any unique approaches or insights from your deal flow process, deal sourcing process, or due diligence process that you’d like to share with our audience? Is it a unique system or approach that you use, and how do those lead to your success?
I think one of the things that’s most important in venture is to keep your network fresh, because you never know where the next great idea is going to come from. What I see as an area of opportunity for new individuals joining the venture industry, is to figure out where you have differentiated access and advantage to a network. If you’re joining an established firm, they most likely know the other established players in the ecosystem. But the great thing about venture is there is always a new crop of emerging angels and managers. Building out that network is valuable for someone starting a career in venture capital.
We tend to take the approach of, ‘Here are all the relationships that we care about, who’s going to be mapped out for which network?’, and continuing to make sure touchpoints are created on a frequent basis. If you’re joining a venture firm for the first time, it’s a great idea to go to partners and ask to map out all the relationships. Let’s figure out what the right spaces are, because there’s always going to be whitespace given what’s going on with emerging managers. As a new entrant at a venture firm, the person can work to fill that whitespace and make sure to expand the set of relationships. That’s a great best practice.
You’ve identified a potential deal and you’re starting the due diligence process. Is there anything that you do that you think is unique in that process?
We are strong believers in backchannel referencing, and it’s paid off for us in a positive way. We get to hear insights about people longitudinally, plus backchannel referencing has proved even more important during COVID than ever before. We’re operating in a world in which we’re investing in people that we’ve never physically met. When you backchannel, be deliberate about making sure that you get all vectors of that person, so you gather insights from different vantage points. It’s important to think about putting that puzzle together. The optimal backchannel references cover all the bases.
Do you have any predictions for the future of your industry?
We’re very optimistic that we are still in the early innings of the technology revolution. If you look at the e-commerce industry, for example, adoption has dramatically gone up but online transactions still account for less than 15% of overall consumer spending. Another big trend that still has legs is the migration to the cloud. We’re investors in a company called Talkdesk, that does cloud telephony for call centers. As call centers become more and more distributed with people working from home (as opposed to a big call center), you need nimbler next-generation software. Talkdesk is optimally positioned to help.
In early March, we contacted all of our portfolio companies and told them that we thought this was an unprecedented event requiring corrective actions. We’ve been pleasantly surprised by the resiliency of our portfolio companies. Even though there are companies impacted by COVID, many have become beneficiaries of these shifts away from the old way of doing things by making improvements to serve the next-generation.
Anything else that you’d like to share?
I would say with networking, there are two important things: doing it and paying it forward. Your network is the lifeblood so it’s really important, whether you’re an introvert or an extrovert. I think most people peg me as an extrovert, but I actually enjoy my alone time. I enjoy thinking about things, I enjoy time to step away and reflect. But irrespective of what part of that spectrum you fall in, it is really important to put yourself out there. You can do it in a variety of ways. There is conference attendance with a “hands-on, kissing babies” type of approach. There’s also the option of creating really thoughtful pieces and putting them up on Twitter or a blog. Networking doesn’t have to be what some people think it is – it’s not a four-letter word. You can do it irrespective of whether or not you’re an introvert or an extrovert, but you need to do it in a way that’s authentic to who you are. It is really important to find something that is authentic to you and to just get out there and do it.
I also think it’s really important to ultimately be paying it forward, which ties into believing that you have something to offer. I think for a young person, that means figuring out what’s unique about themselves and then really using that to help others. I’ve heard people say things like, ‘I’m a junior analyst, or I’m in an MBA program, what could I possibly offer a partner at a venture capital firm?’ What you could offer is the fact that you have a unique insight and a unique network. For example, an MBA grad knows many people graduating from their program. If you look at who starts companies, a lot of MBA graduates start companies with their unique network. Being thoughtful about what is unique based on your life experience or your network, and packaging that up in a way that you can extend it to other people, makes a very attractive candidate.