Investing in Software – Utilizing Data to Improve Efficiency

Lu Zhang @ Fusion Fund and Jordan French @ Grit Daily
Main Stage
Ascent Conference 2020

Jordan French [00:00:00] Lou, you are now live at a Ascent conference, wonderful, thanks, everyone. Big shout out to Ascent conference for putting this on. Welcome to 20 20 everyone. My name is Jordan, French founder, executive editor at GRET Daily News, where we’re based in New York with all sorts of exciting coverage of events that include a spent conference here with me, a much awaited panel with a rather fireside chat here with Losing Fusion Fund. Welcome, Lu.

Lu Zhang [00:00:34] Hi, Jordan. Hello, everyone. So glad to be here.

Jordan French [00:00:38] Yeah, wonderful, so, so many uninitiated in the venture capital space, just some really quick background on you. There’s, you know, certainly it’s an arena fraught with risk. Certainly there’s a lot of a lot of confusion about the space. And my aim here with you is to rise to. Luis is even with your own background. You had your own adventures before you started in venture capital, could you share those?

Lu Zhang [00:01:16] Yeah, hepatocyte, so my background, my journey starts in the shadow of a scientist at the center. Before that, I was born and raised in the Mongolian came to United States years ago. So initially I was the focus of academic research. But later, one of my technology has an application for Type two diabetes diagnostic. The Manhattan was up sensor and so it’s nine basic approach, a pretty fancy attack. So I built a medical device company based on my own technology and the journey for a couple of years as a solo funder. Eventually, the company was acquired by Boston Scientific. And so that’s my journey and also the first Aliko commercial from a researcher to entrepreneur. But during my journey as an entrepreneur, I had lots of experience working with VC and also have really in-depth understanding of the lifecycle for early stage startup, first kind of experience as an operator and also understand from funder perspective how to leverage capital to grow the company and later to start to do some angel investment was my capital return from my exit and also draw on that AVC from other venture partner, which give me a sense from the other side of the table I found the fun joke about I went to the dark side, but I was like, I’m your friends in the dark side. So was the experience to a different side of the table. I was really able to better understand how capital could assist and accelerate the good technology or commercialization to really act as a catalyst. So that’s also the motivation for me to launch fusion from five years ago, not only me, all the partners, including my team of entrepreneurs, and also because of that experience, a lot of the founder we invested and the work was there repeating success or failure. So I think having the operation, the entrepreneur experience, really help us better understand the founder. We better support a founder and also be able to identify that the best company and the good technology for the next step.

Jordan French [00:03:20] And thanks for sharing that, Lou. It still begs the question, though, and not not many of us have an exit, certainly not nice clean ones. And so, like, it begs the question, why not continue after acetone, which you sold and established that earlier with a with a second company, go bigger, better, rather than, you know, effectively switched sides to the dark side, as you called it.

Lu Zhang [00:03:47] Yeah, and definitely I have other friends asking me the same questions, especially because I started my company when I was 20 years old, so when I lost and found that I was twenty five years old, so people said, OK, you’re so young, you could definitely do another company. I thought about it. I have other application and the patent technology I applied to. But during my process of doing Anjo investment, myself and all sorts of entrepreneurs, Loosley worked with the VC firms to work with the founder I really like. I have lots of passion for early stage tech investment and the meanwhile, I saw the opportunity back in 2013, 2014 that there there’s so many bases, so much capital in the market, but very few of them actually focus on deep tech and health care. Most of them are still going after the business model innovation. But I always say that innovation happens with a cycle starts on fundamental tech innovation, tech application innovation and business model innovation. I was able to do that with my background and also with the founder community. I know the next trend of the next wave of digital transformation is coming. And this innovation base is power to buy not only software but hardware software integration. That’s also a good opportunity for me and me as a former entrepreneur. Daphne, I go dancing to that area, familiar words. I did research. And you also want to see a variety of different types of innovation. I also feel like I have this responsibility not only just leverage capital, but also the resources, connection, everything to power, the next generation of the tech and health care company. That’s the reason I launched Fusion. So I launched Mutual Fund. As I mentioned, some calling their friend said, oh, you went to the dark side. But when I explained to them how I to work with founder and also where we also empower ourselves until we see from with lots of technology, with lots of data analysis. So we’re talking about using new technology to do the digital transformation for the traditional sector. See is kind of a traditional sector as well. So the approach I use and also the way we interact with founder really makes us kind of stand out and they become a strong differentiation for us compared with other see in the early stage. And meanwhile, for me personally, I created this company, Fusion Fund. That’s my second startup. Yes, it’s a B.S. industry, but it’s my second startup. So we’ve been working very hard and all the team members being working and running the firm like entrepreneurs. So that’s the part I really like about it.

Jordan French [00:06:14] Certainly, Lou. And it’s it’s an interesting point that you bring up an observation self reflecting that AVC itself can be a startup. And one very common question for any company, including startups, is how do you make money? Inquiring minds want to know.

Lu Zhang [00:06:39] Yes, happy to share that. I think it’s also important for sometime Fondo to understand how we make money and sometimes you understand why we are looking for a certain type of the founder of certain type of exit to make sure they have the funds return. So, you know, Atabaki was set up a fund that they had amendments that charge annually. And also that carried interest in the future is a return for the GOP in terms of management fee bonus that just more like a call center. That’s the basic fee for maintaining the operation of the firm, like cutting HRR and all this logistic, legal, finance, accounting, etc.. But the true return for the fund is the investment return, like reinvest the company when the company exit got very good multiple and they wouldn’t. This return would definitely return the principal to the LP and the furtherest will have carried interest as a GP. That’s also the result. When we calculate a potential exit, we need to think about. Consider the fund’s size and how how big. The exit I have from the company I invest will make sense to become to become meaningful for my fund, return for them or for my phone says one hundred million dollars. If I have a company exit for them, a words of 50 million dollars going to give me only. For example, if I have to send Fimian in return, it’s OK return, but it won’t really contribute a lot to my 100 million dollar fund. In terms of fund return that’s arisen as one hundred million dollar fund that are looking for company potential could generate at least half a billion, even billion dollar exit potential exit for us to get a sizable and meaningful return at a fund. So I think this financial structure is very important for fund there to understand that, you know, whichever company your build up and what is the target of your potential exit. And then you could trace back to which type of V.C. you should talk to. For example, some company especially was in health care there, like medical device company. That potentially exit might be lower than one and then probably better to work with. VC was a smaller fund set then, you know, this neutral benefit. And meanwhile, another type of fund there, probably the company is going to be a cash flow company rather than potentially have a big exit. Then probably better to work with, for example, individual investor. They would prefer to have, you know, kind of focus annually rather than the big exit at the end. So I think that’s also kind of some small tips for founders about how to do research about a are talking to and to choose the right partner for a different stage of fund raising.

Jordan French [00:09:16] It certainly and I think, you know, your rule that you established is so important, we’ll even invert it. It explains why agencies, for example, marketing or otherwise, basically small businesses, they don’t attract VC funding because of the way you’re incentivized as you establish. I think that’s often important. Note that’s that’s overlooked. It’s you’re looking for the the home runs and the Grand Slams most of the time, to use a baseball analogy. Speaking of speaking of Wordplay, Fusion Fund, what’s behind the name?

Lu Zhang [00:09:57] Thank you for asking. We will rebrand the name to future funding twenty seventeen and I really like that this was fusion. I got a fusion from nuclear fusion because it’s like beneath the surface, ocean is kind of similar mandate as we do early stage tech investment. Small atom came together, but it was able to generate a huge amount of energy. That’s also the magical part of being an early stage investor that we’re able to investing maybe not be a small amount of a couple million dollars, but serve as a catalyst to accelerating the company to become commercialization and be able to have a much bigger impact of the world. And another car that I really like about a fusion is, you know, so many people talk about offensive technology out of recession, which our scientists definitely understand are super fancy technology available in the research world. But the critical part for us, especially for commercial investment for ABC, is we need to find a good timing and also good technology, better, faster and also cheaper. Ready for commercialization. Excuse me. So this fusion is also about how to fusion between the market application and also technology itself, especially now, you know, a lot of large corporate are going through a digital transformation, are looking for solution, QSR industry problem, but they do not necessarily understand which type of technology is available to provide them the solution on the other side of the technology, not necessarily identify the true problem of the industry. That’s another fusion we try to bridge. And we also set up the Saxl Network internally at Fusion with Sorte to sealable from Fortune 1000 company. Then we were able to build up a bridge between us and to see sea level from the large concrete to understand what’s truly needed by industry. And meanwhile, Sarus, they were able to directly talk and the partnership was lost early stage startup and definitely also benefit for the company to be able to get very fast market validation. And the one last joke, I like fusion food as well.

Jordan French [00:12:17] Thank you for that slight delay on our line, and I’ll I’ll keep myself concise. You mentioned the words dark side. I just want to touch on it really quickly. There’s this reputation in the space yet. And the other hand, it seems like the VXI industry supplies much needed capital to start ups. Why? Why, though, curious, curiously, why does that description exist blue, this dark side terminology, as you call it?

Lu Zhang [00:12:49] I think it’s because somebody said a misunderstanding and also miscommunication between the both sides, because, to be honest, the woman was a founder and not necessarily have all the plans and experience working with me as well.

[00:13:02] There’s some good supporting cast also either some sort of obesity here, but that means I found that I did not like it. So that’s the result of some some form, though they probably have frustration and the difficulty working in music on one set because they don’t feel like they’ll be talking to really understand what they’re doing, but they’ll be making a decision whether to fund it or company. Another thing is, one, they even got the money from D.C. sometime this week on the board. Make a suggestion or even pressure for founder to do things they don’t want it to do. So that’s the main reason why there are some type of tension sometimes between there in D.C. But I would say for the past couple of years, things are getting much, much better. It’s also because there’s more VXI really understand that the countertrend of the technology innovation and that they were able to give in depth and also very good feedback suggestion to the founders. And the meanwhile, I’ve been telling founder that another important thing for Fungo is really to research before you talk to a busy investor to try to see what is a good match between your company and their firm, then the conversation will go much better. And you will also get very honest and useful feedback from ABC who truly understand the industry and not just in terms of portfolio management is, for example, something that really hate micromanagement. And I definitely see and heard that some B.S. from when they have a partner seat on the board, that they will try to make lots of decision and try to kind of do macro management a little bit. For the founder that definitely frustrated, especially good or good funded pilots were asked would never do macro management. We actually one way to a founder to work with. We want to choose the best founder and then I trust him as far as the captain of the as a captain. And as I said, we are the catalyst that when we sit on the board, we definitely give lots of suggestion, the feedback, but we try and also the governance of the company for sure. And meanwhile, we really respect a founder to empower him or her as the true decision maker at the end. And not only as I think a lot of them are doing that with its founder as well, is also requires both side of have a really in depth communication before the board formed and then everyone understand fully well aligned of which type of communication, communications now I wish have a collaboration style will be good and mutual benefit for both sides really working together for the company. And another thing, just a small suggestion. I want to give it to a founder, especially by working with we on your board as well. ABC not only investing, but also training as a board member. They also have a priority to to consider the companies the best interests, not just the fund, the investment. So will you have a list on the board? Really, really consider them as an employee, as a member of your company. So not necessarily just only sharing the good news with the board member. I was joking with founder that if I only heard good news from you guys, I said don’t worry about it, because I’ve been through the company building company myself. I know it’s always up and down every single day. So as a board member, I want to hear you tell me highlights and lowlights only if I know what challenges. And you’re facing an even mistake you made. I was able to truly support you and help you. I think sometimes it’s because they’re are afraid of telling one member of the lowlights how bad news and the to the end all of a sudden saw the big bump and then there will be some conflict, an argument between the investor and the founder. But I feel now with this communication getting better, definitely the relationship between the founder and investor are getting much, much better. But to the end, as I said, you need to do the research is really important for a fund there to find the right partner right away. It was at early stage and the right not necessary means that befriending B see really depends which have an investor and which type of support you need from external at a very early stage to a Saturday to the girls.

Jordan French [00:17:05] Yes, and speaking of of the ups and downs, Lou, as you call it, many industries, particularly those that are also VC funded, even in tech, are hurting this year, or at least there certainly were earlier this year. We’ve seen some light at the end of the tunnel, but the medical medical device, perhaps medtech, biotech, health care in general, elder tech, some of the some of these subindustries that you can concentrate in appear to be doing well. We all want to know for Fusion Fund, how has the landscape.

Lu Zhang [00:17:50] Jordan, you got caught up by the last couple of seconds, but I guess you you your question is about how do I deal with this idea? Any change of the last week involving vestment and also the trend of already this year about venture investment? OK, I would just answer based on I guess, in the four hours we’re being always focused on the attack and price tag on the health care tag, and for the first of two factor, our main focus is really how to leverage new technology to push the digital transformation of the traditional sector.

[00:18:26] And meanwhile, it’s not only about like data, artificial intelligence, and also for the whole network of technology. There are big support and invest a very good portfolio of compute as computing technology. So I think the digital transformation also got accelerated by the pandemic. Daphne, this year, 2020 is a challenging year for the whole of innovation community, for the tech sector. But on the other side, it also kind of accelerated the adoption of the new technology from the not only tech company, but even traditional sector. And also the digital transformation is kind of happened every time when we have a downturn. For example, back in 2008, when the financial crisis happened, they kind of on this side effect is pushing about the cloud computing. So this time is the digital transformation. That really is a good news for for the company working on that application. The good news for us, because our portfolio company actually goes through a period of rapid growth of the revenue and also when they’re doing the new round of fundraising to support another sector, as you mentioned, is health care. I’m very happy to see that there’s more capital and more talent fund. Our focus on health complication right now, because to be honest, as a former health care funder is health care, especially medical devices. It’s not very attractive for funding for a long time. But copper isn’t definitely in the hardware components of another thing. It’s FDA approval. But for the past couple years, I think the things are getting better and also being very proactive. Try to promote, for example, in health care. Edgecumbe for health care. Is this important for new attack with the traditional like like health care, medical device, innovation like microfluidics really provide a new new potential and a big market for us to explore how to better try to personalize the diagnostic, personalized the treatment plant. Even digital digital transformation of the health care industry itself and the industry in general is 20 percent of the US GDP by the during pandemic. We also saw this challenges huge challenges that could potentially be solved by technology. So our house car company was doing very well and also lots of funding are in this area right now for for investment. So especially I feel like an housecoats for not only cancer diagnosis, but for mental disease or mental wellbeing. Another thing, just the general enterprise to application for the health care, no matter regulator and insurance company, our traditional medical device company. So that’s out. A big trend happening right now. And also at last, I want to share a little bit good news with everyone and that regarding FDA approval for both investor and founder for most of our company, health care, medical device and health care, they were able to get FDA approval within half a year. So the celebrating of this whole process of approval definitely cleared out for innovation to to do commercialization, to be much faster to adopt it by the market. So really wanted to see more funding and more capital concentrate either on the dose confirmation and the health care.

Jordan French [00:21:32] Certainly a lot of a lot of insights there and and one one to one to distill of many points that you make, there are regulators out there that can be very helpful, especially from the four investors as well in the investment landscape. And that sounds like that’s within your core competencies, Lou. At Fusion Fund on our last minute here, I do want to market you a bit and I know some in the audience. They do want to pitch you, especially after hearing this. They do. They do run companies that are likely within your wheelhouse. How can everyone in the U.S. audience reach you?

Lu Zhang [00:22:24] Yeah, so love to hear from you guys if you are doing some interesting company, I’m looking for early stage investment. We do see too serious a Texas could range from half a million to two million dollars for the show. Also have a capital reserve for Parada to support a fund. So if you want to contact, contact me. Feel free to either connect me linking you could email me without genital contact, email contact at Phusion, then we’ll be back to you. And we’d love to potentially work with some of you to fund the company and be able to support you to the next stage.

Jordan French [00:23:05] Certainly now you all have Lucy email the picture, she’s open to questions, that’s all the time that we have. My name again is Jordan French Grit Daily News. Check us out. Big shout out again to Troy and the ascent team for putting this together. A lot of hard work behind the curtain, so to speak, and look forward to seeing you all in person live in New York next time. We’ll see how that goes. And certainly, Lou, some of the companies she’s working with should help us all mitigate the impact of the current pandemic. Lou, thanks again.

Lu Zhang [00:23:45] Great. Thank you, Jordan. Thank you, everyone. So glad to be here. Everyone one, I look forward to see you in person next year.

Jordan French [00:23:53] Until next time.

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