Arun Penmetsa, Partner, Storm Ventures
Arun Penmetsa is a Partner at Storm Ventures and focuses on early-stage Enterprise software companies, primarily in SaaS, Security and Digital Health. He has extensive experience building enterprise software solutions at Oracle and Google. Arun is passionate about healthcare and using technology to improve outcomes and drive efficiency for patients, providers and payers. He is also an investor in several healthcare groups in India where he serves as an advisor on technology and population health. In his spare time, Arun enjoys spending time with family and hiking.
How did you get into the world of VC? Was it your first job?
No, to give you a little bit of background, I started out on the technology and engineering side. After college and graduate school, I worked at Google and Oracle, building enterprise products for about five years. Then I went to business school, and joined Storm Ventures right after that. It wasn’t my plan going into business school, but I got introduced into the world of venture capital (VC) when I met a lot of VC’s, mostly at startup conferences and other networking events. I was really curious, because one of the things I was trying to do in business school was to learn a lot more about other industries. I’d only worked for a few companies, so I was curious how the industry worked. I spent the summer between my two years of business school at Storm. I really enjoyed the work I did, and really enjoyed working with the Storm team, so I was happy to have the opportunity to come back full time.
Did you see yourself doing this, or being where you are today, when you graduated college?
When I graduated from college, and when I finished graduate school, I was thinking about a more tech-focused career. Like I said, I worked in engineering and product at Google and Oracle. I was trying to transition more into a startup environment, so no, I wasn’t really thinking about venture capital.
Why did you invest in 4me, the Alchemist company? What differentiated them from other investments you were thinking about at the time?
A couple of things. At Storm, we focus on enterprise software and spend a lot of time on industries that are not necessarily mainstream. So I was always interested in the service management space. Given the general level of innovation that had been happening, the service management space was lagging a bit compared to other industries, so I thought there was a lot of opportunity there. When I met Cor, the founder and CEO of 4me, one thing that really impressed me was the caliber of their team. Cor’s background in the space — having started two other businesses, and having successfully exited them really stood out. I thought the team had a unique perspective and depth of knowledge about the industry. That was one of the biggest factors for us.
We also have a broader thesis about how data flows through a lot of these industries. Historically, if you think about it, the way that a lot of technology is set up in these industries has created data problems. There are different systems and different owners for a lot of the data that is needed for these companies to manage their own workflow. As service management has evolved, and this is playing out in a lot of different industries, the need to operate across boundaries and silos has increased more and more, whether that’s geography, or technology systems, or different departments. I don’t want to get too into the weeds, but service management is broadly going through a transition where the new focus is on SIAM or Service and Integration Management. The team at 4me really built their product for that. We thought the shift in the industry really aligned with the expertise the team had, so we thought that was a good match. Plus, they were winning against the more established incumbents as a startup that was bootstrapped, so the growth was impressive. A combination of these factors led us to invest in their company.
What are your thoughts on Alchemist in general?
I think the program is great. I’ll give you a little background about Storm. We’ve been around for about 19 years, invested through five funds, and we’ve pretty much been enterprise focused for those 19 years. The last couple of funds have all been focused on software. In many ways, what Alchemist does is really a perfect fit for us. It’s definitely a sector and stage fit, because we mostly do series A investment, so that’s been fantastic. I’ve met Ravi and Danielle a few times, and I think their focus on running a slightly longer program is important, because things take longer in the enterprise space, particularly as you go into some of these deep tech industries. This helps companies get to a stage where they can really start talking about go-to-market and what levers a venture capital firm like us can bring. I think that’s critical because a lot of times, when you work with accelerators, they have great founders and great companies, but it still ends up being too early for us.\ Alchemist has set up a good model, a long enough program with good mentorship and support, where you get to a stage where a VC firm like us can add a lot of value. I think I’ve been going to Alchemist Demo Day since the second Demo Day. It’s been great working with their companies and seeing them as they grow.
What’s the size of your current fund and how does that compare to funds at a similar stage in Silicon Valley?
Our current fund is $180M, which has been about average for the previous funds as well. Funds are obviously getting bigger, just given some of the recent raises we’ve seen. We’ve decided to stay at a similar size, primarily because we really focus on investing in companies just as they’re getting to the product market fit stage and we work with them on finding go-to-market fit and scaling beyond that. We help them think about building the right sales model, building the right playbook, and thinking about what hires they should make. We can definitely make the fund bigger and bring on more investors, but we’ve found that this has worked for us. Companies that we really want to work with are in that early stage, where they want that first institutional investor. We’ll partner with them and help them scale through the right process.
What’s the typical check size and how is that typically structured?
Typically, our check sizes for the A rounds are in the $2M to $5M range. We can go lower, and occasionally we’ll do seed rounds, or we’ll do larger rounds sometimes. Storm has invested in about 150 companies, led investments in a number of cases, and we’ve co-led, so we’ve pretty much worked with everyone. We’re not very rigid in terms of needing 20% ownership, but we like to own as much as possible, because we tend to be really hands-on with our companies. We’re definitely not a fund that makes a huge number of investments. We are somewhat concentrated and would rather go deeper with our companies than just go broader.
Is there a stage you typically prefer to invest?
Series A. The sweet spot is definitely the A for us.
Do you have a specific vision or focus that differentiates you from other funds?
The emphasis on go-to-market. We spend a lot of time working within the firm and working with other organizations that we can bring in to support our portfolio. Once you’re selling your product to a handful of customers, and there’s repeatability in the use case, we can help you figure out how to scale. One of the biggest issues is that early on, getting to that $500K or $1M run rate, a lot of that comes from founder sales. It varies depending on the size of the account and other factors, but when you make that transition to a sales team and the founder steps back a little bit, a lot of times that process doesn’t go smoothly. The depth of knowledge that the founders have about the sector, the problem they’re solving — it’s hard to replicate that throughout the teams. What we try to do is really think about the go-to-market as a science as much as we can. We want to think about the right playbook, the right sales model, the right customer you’re selling to, and really building those processes out.
We spend a lot of time with our companies building out that process hands-on, so that they can effectively make that transition to scaling, and they don’t hit a speed bump when they get to that stage. When companies come to us, a lot of times we’ll see that they have a grand vision and a good roadmap, and have predictions that are up and to the right that we hope they’ll hit. But on occasion, they’ll stumble a little bit. A lot of it is making this transition, and getting your playbook down, with the right sales model. That’s one way that we try to differentiate from other firms. Additionally, we’ve been very focused on enterprise for 19 years, so we have a huge network in the space across a variety of industries, that can add value to our companies.
How do you think you differentiate yourself individually from other VC’s?
To build on what we talked about, we have built deep relationships in various enterprise sectors given the focus over many years. I’ll give you an example: I spend a lot of time focusing on healthcare at Storm. Over the last few years, we’ve built a strong healthcare practice. As part of that, we have connections to a lot of health systems across the country — including physicians, practitioners, and entrepreneurs. In that one example, we can definitely bring a lot of those connections to bear for the startup. We’ve sat in a lot of these practitioner’s offices, so we can really understand the deeper workflows, that comes with selling to major players and providers. A lot of the work that happens on the backend isn’t really visible to these companies. That’s just one example of the insight and level of connection that we can bring for our portfolio. In terms of the broader firm itself, the go-to-market is a big area, but we also bring in a lot of experts who can specifically give advice on sales and marketing. One other area where I’ve spent a lot of time is security. In fact, we have a number of CSO’s working out of our offices pretty often.
What makes an investment particularly compelling and what’s a big red flag that would make you pass?
In terms of red flags, maybe this is an obvious one. We’re looking at mostly enterprise, so if the founders have never worked in industry, I think that’s a big red flag. It’s not that I wouldn’t talk to them or not invest, but it’s something where I’d definitely want to dig in more. Especially if it’s an area like Cor with 4me and service management, it’s hard for an outsider to really get a sense of what the problems are, and what the incentives are, in terms of why these problems get created. So, it’s not always a technology solution and it’s not always that the best tech wins in a lot of these cases. We really think hard about the unique insight that these founders are bringing, and how their background and experience really leads to that.
On the flip side, things that I would definitely look for, because we invest so early and have to bet on the team, would be the background of the founders. We also look for their early ability to win customers. A lot of times, we see founders that work hard and have passion, which enables them to get customers. However, a lot of the customers are using the product for different use cases. That’s fine early on, because they’re still trying to find the right product, but we’d like to understand what’s really working, what’s the sweet spot early on, so that they can find repeatability. I think that repeatability is important because that leads to more usage and lower churn. That’s when you’ve really found a pain point worth investing in.
We also think about market transitions, and ask if there is something fundamentally changing in the market. Not just a better version of what’s been done before, but something fundamentally changing in the market that will lead people to adapt a new technology, a new product, or a new workflow. When we meet entrepreneurs, we try to already have a thesis on the market, so that we can make faster decisions about whether the idea makes sense or not.
What do you think separates a great founder from a good founder?
One of the things is the ability to hire really great people. As a founder, you have insight into a certain area, but you can’t do it all. That’s why a founding team in general needs to be well-balanced. I think the biggest thing is being able to sell people on your vision and hiring people that are better than you. If you can hire well, I think in many cases, the rest of the issues can be addressed, because you’re getting the right set of people that can work together and solve problems. It’s a hard thing to test for, so we try to spend a lot of time with our founders.
Would you be more likely to fund a really experienced team with a mediocre idea, or a team with no experience that had an amazing idea?
It really depends on the idea and the use case. I would say I’d pick the team over the idea, because it’s unlikely you’re the only one with the idea, meaning that a lot of your success is based on execution. Ultimately, you really have to hustle and execute. On the flip side, if I can add a caveat, the one area where that can be a little more murky, is when there’s a huge market pull. In that situation, a mediocre team in a market that’s really taking off can probably execute better than a great team in a market that has no momentum. If the market is really taking off, a good team can have better outcomes than a great team in a bad market, no matter how strong they are. Oftentimes, we have theses in certain areas, so we have some view on the market and how that might impact these companies.
If there was a piece of advice that you’d give to founders who are raising money that isn’t shared enough, what would that be?
Founders often focus on the current product that they’re selling today and their long-term vision, which is grand and massive if you achieve it. However, a lot of times, in the middle, there’s a big gap. Having a clear strategy for how you’ll progress beyond the immediate pain point that you’re solving today is something that people don’t spend enough time on. I think having a viewpoint on how the market evolves is critical. It’s knowing what transitions are happening in the market and how that gives them tailwind, and understanding why that is the case.
Which investment were you most proud of and why?
Obviously, I like 4me quite a bit. I don’t know if there is one I’m most proud of. Going back to the industry transition idea, where it’s critical to find the right time to make a change in the industry, some of the best companies get the timing right, where many others are too early or too late. In healthcare, there’s a company we invested in called Lexigram, that’s helping payers and providers transition to the value-based care model. They’ve done really well. In security, there’s a company called TruSTAR that’s truly leveraging how companies share information with each other and really enabling that. Those are a few.
What areas are you most excited about now and moving forward into the future?
Security and healthcare are two areas I am excited about due to the changes taking place. A broader answer is that no matter what industry you’re in, if there’s a market transition that’s happening, I would be interested in learning more. The other thing that I think a lot about is the whole idea of the data economy. Historically, a lot of data was stored in silos across organizations, team, and geographies. Any company that is truly building insights across such data is a company that I would love to meet and speak with. So, there’s not one particular area, but these are a few of the areas that excite me.
About the Alchemist Accelerator
Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley — including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures/year. Learn more about applying today.