Veteran VC Kittu Kolluri has $216 million more to invest through his new firm, Neotribe

Kittu Kolluri - who in late 2016 stepped down as a general partner with NEA after 11 years with the investing giant to form the much smaller, much earlier-stage outfit Neotribe - has closed on $216 million for the outfit's second fund, a sizable jump up from its $130 million debut fund. (Kolluri and his team separately kicked in enough money to bring those funds to $138 million and $220 million, respectively.)

We talked yesterday with Kolluri - a longtime operator whose earlier career spans across Silicon Graphics, Healtheon (which he co-founded), the VPN software company Neoteris (which he ran as CEO) and Juniper Networks (which acquired the company that acquired Neoteris) - to ask about the new fund and Neotribe's mission more broadly. We also wound up talking a bit about founder attitudes around being publicly traded, M&A and what VCs get wrong about founders (in his view).

TC: For those who don't know you, why did you leave NEA to start your own thing?

KK: We wanted to capture an era gone by of investing in companies and founders developing breakthrough technologies that stretch the imagination. They're solving hard problems but also looking around the corner and discovering a macro trend that they can then use to develop a new category of product.

TC: Wouldn't all VCs say they are doing this?

KK: There are two types of VCs - those that fall in love with the story and who look at the world through the founder's eyes and work really hard to influence the outcome, and those who look for proof. We're a poster child for the first category. We like to take not just technology risk but also market risk.

TC: You've been involved with many startups over the last 14-plus years, so what are standouts that underscore your point?

KK: I was an early investor in Climate Corp. and Bloom Energy and Aruba Networks; these were personal investments. Robinhood and VeloCloud [acquired in 2018 by VMware] are other examples from [my time at] NEA.

There are extremes in venture capital right now. On the one hand, you have micro VCs and super angel types who write a large number of checks and who take market risk but who have sort of a spray-and-pray strategy and who don't have the wherewithal to make a difference at the companies they are funding. On the other extreme, you have large venture funds with large pools of capital but whose check sizes need to be so large that they can't make investments at the seed stage; their checks start at $10 million. I was at NEA and you can't afford to write $3 million checks.

There's a yawning gap in the middle, and that's where we play. We're investing $2.5 million to $3 million at the low end and up to $5 million at the high end, and we're the first money in a lot of the time.

TC: You mentioned a wide variety of companies - Robinhood caters to consumers; VeloCloud was an enterprise company [that tackled software-defined wide area networking]. What types of companies interest Neotribe?

KK: Companies with a deep tech nature that you can't build with small rounds but that require scaffolding investment. One of our bets is Interai, which is using computer vision to automatically generate a new user interface based on a business process that you're trying to simplify. We invested $2.5 million for 20% ownership and helped them through those initial stages and about nine months later, they raised close to $9 million from Battery.

Climate.ai is using AI-powered and machine learning to predict medium- and long-term climate changes and weather patterns and the risks of extreme events and we led the seed and they are just in the process of getting [purchase orders] and will be [in the market soon for funding]. Fortanix is using runtime encryption to solve security and privacy. We led its A round and it closed on $23 million in Series B funding last year led by Intel Capital.

TC: What do founders reading this need in order to get a check out of you?

KK: We're very selective. We fund 2% of the inbound deals that come to us. We funded 25 companies with our first fund but actually met with 1,500. But broadly, we're looking for companies that are using data science to develop software to solve enterprise IT type problems and companies using engineering and data science to alter the pace of innovation of physical assets, like robotics or diagnostics or clean energy. Solving a hard problem is the first prerequisite.

TC: How do you describe your value-add" to them?

KK: We're conviction-based investors, so there aren't going to be a large number of companies in each fund. When we have conviction, we'll write a meaningful check and expect a meaningful percentage in exchange for our work hard.

When a founder is feeling vulnerable, their first call should be to us, because I've been there; I know what it feels like. Someone on my own board who I talked with regularly - one of my favorite VCs - was Danny Rimer [of Index Ventures]. I would call him at 8:30 a.m. after I dropped my son off at school, and he would say I'm looking at this deal, what do you think?" I remember he asked this about MySQL. I said, Danny trust me, suck it up and invest in the company." From my vantage, there was a real give and take, like a real friendship, and if I was screwing up something, I told him.

You want someone who you can be vulnerable with. Authenticity is something that is getting lost a lot. I don't want to be a referee or to do what a lot of Valley VCs do, which is to spew their wisdom at board meetings. The work is really in between.

TC: Has COVID-19 changed anything for you?

KK: We're working out of our home offices, but truth be told, [the situation] hasn't changed anything significantly. We invested in two companies so far without meeting the founders, which is a first for me.

TC: How did these come together?

KK: One is Vendia [a multi-cloud serverless platform], whose launch TechCrunch covered. It was co-founded by two Amazon veterans, one of whom, Tim Wagner, was the inventor of serverless technology at Amazon, and the other, Shruthi Rao, who was the former head of blockchain at AWS, so they have a lot of experience with supply chains and they're building a serverless platform for better code sharing because they saw a burning need for this at Amazon and Amazon is keen for this solution to exist. We were the first money in, followed by Correlation [Ventures] and Floodgate and Westwave [Capital] among others.

TC: Seemingly, these Amazon vets had lots of options. How did they find you?

KK: They were introduced to me by a founder I'd backed in my NEA days; that's how I got to know them.

Another high-profile founder who took money from us is Bill Gross, who is now running Heliogen, which is using computer vision and solar concentration to generate high-process heat that's close to 1,600 degrees centigrade, which is one-third as hot as the sun's surface. And they're doing it in a clean way without requiring any fossil fuel. We invested in the company's Series A-1, which was a pivot from an earlier photovoltaic idea, and they more recently raised another $25 million.

TC: Out of curiosity, what do you think of this stay-private trend that we've seen develop over the last decade? Does it make sense to you?

KK: I don't think it's a healthy trend for companies to be staying private for this long. If you rewind back to when eBay and Amazon went public, their market cap was probably $200 million and $400 million or so and most of the value accrued to the public investor. Then you look at Facebook, which went public at $100 billion and where the value accrued to the founders and the private investors. Sure, if you bought the shares early on, you'd see 2x or 3x but it's not a 10-bagger, as Peter Lynch would put it.

Going public gives you a currency that you can use for strategic purposes, too, to explore growth.

TC: Yet a lot of companies with big balance sheets don't seem to be shopping a whole lot.

KK: I'm appalled by how few acquisitions that some of these companies are making. When I was at Juniper, I envied Cisco, whose corporate development arm made hundreds of acquisitions. Some percentage of these don't work out, but they made some very smart moves, [buying] Crescendo, StrataCom, Cerent, Airespace...

I give Facebook credit; it acquired Instagram and WhatsApp relatively soon after going public and boy, what fantastic acquisitions those have proved. Google similarly acquired YouTube and Waze. That's how you grow. You use that as a weapon, too.