The below is a full (unedited), machine-generated transcript of a Youtube session / podcasting episode I recorded with Kyle Lui of DCM in May of 2021. You can view the video/listen to the podcast on Youtube, Apple Podcast, Stitcheror wherever you get your podcasts.
Erasmus Elsner 0:06
So welcome everybody to another episode of Sandhill Road. And I’m super excited to have another guest here with me today, Kyle lui, who’s a Partner at DCM. Kyle, are you ready to take it from the top?
Kyle Lui 0:17
Yeah, absolutely. Thank you for having me.
Erasmus Elsner 0:19
So So, where does this podcast find you today?
Kyle Lui 0:22
I am at home in San Francisco, Selma, where I have been for most of the pandemic. And this is mostly the view that people see. So I try to keep it green because it brings people joy.
Erasmus Elsner 0:34
Has it been like this all through the pandemic? Or has it become greener during the pandemic?
Kyle Lui 0:39
Oh, it’s definitely become greener. folks on my team are like, Oh, I had the pleasure of like, seeing when Kyle first got the plants and then they’re like, been growing over the last year. Yeah.
Erasmus Elsner 0:48
Love it. So maybe for the audience, give us the Cliff Notes of who you are the TLDR.
Kyle Lui 0:53
Absolutely. And I’ll keep it short. I know VCs always say that and don’t keep it short. But I’ll try to actually keep this initial intro very short. So I started my career at a firm called Pantheon doing private equity secondaries. spent a few years doing that, that brought me out to Asia. I was in Asia for a few years and went to business school. It was in business school that I started my first company graduated started my second company that company choice paths ended up getting acquired by Salesforce. And then I spent a couple years at Salesforce as a product manager and about seven years ago joined DCM initially as a principal and then promoted to partner at DCM. I lead a lot of our early stage b2b and consumer investments for North America. So yeah, let’s start
Erasmus Elsner 1:34
out with DCM. It was originally started as a firm called Dol Capital Management. So DCM is one of those few firms that can really claim to have a long track record both in the US and in Asia. It was started I think, about 25 years ago.
Kyle Lui 1:48
Yeah, DCM was started in 96. By Dixon Dahl and David Chou. Dixon was early partner at Excel. In the 80s. He started the industry first telecom fun. And then in the mid 90s, Siva spun off and started his own firm called Dark capital. And he was actually one of David’s angel investors for David’s last company, and got David to join him to be founding partner at a DCM and the firm initially started off focused on Telecom, internet infrastructure, cybersecurity, semiconductor, all of the kind of key areas of tech in the in the late 90s. You know, because of David’s background, we started investing in Asia very early, probably amongst the first Silicon Valley firms to be to be active in Asia, the history behind dog capital, if you look back to the mid 90s, there’s probably like, attend maybe 100, the number of firms that there are today. And so doc capital was definitely one of the kind of old school like established firms been around for a while. I mean, what are 14 fun, but about 10 years ago, really kind of moved to be truly global. So Silicon Valley firm that was investing in Asia to be a kind of globally distributed partnership, before that term was a thing and also moved very actively into application software layer, consumer internet, generalist technology. So those have been the key changes over the last decade. And I joined as part of like the next generation of partners finding that next generation. So yeah,
Erasmus Elsner 3:28
and I think the fund you’re currently investing out of is a recent fund that was announced actually two funds raised 880 million last year, I think it was 780 for your flagship fund, and then you also have 100 million seed fund, maybe talk a little bit about these different funds. Were those the seed fund, and is it at series A and also a little bit about the regional allocation of these funds? Yeah, absolutely.
Kyle Lui 3:54
I call it our Global Seed Fund three, the official name of it is actually a fund which the term actually comes from Android. So as Android fund one fund to fund three, the genesis behind that actually was the Android ecosystem, right as mobile was starting to, to take off, you know, another firm in the Valley had the AI fund around the iPhone. And so we thought, hey, given our ties to Asia, good relationships, a lot of Asian corporates, Android is the dominant ecosystem in Asia and around the world. And so we started the a fund. So that was the initial focus, and it’s since evolved to be a global Seed Fund. The first fund was 65 million invested in companies like a cow. And then we raised the second fund that invested in companies like lime, and then now we’re on our Global Seed Fund. On three there’s $100 million fund that is majority invested in the US. We’re doing much more at the earlier stages in the US than we are in China. And then our main venture fund, our flagship Fund is a $780 million fund. That’s actually the largest fund that ever raised. Historically, our funds have been between three and five 500 million, and we’ve kept it intentionally small this last fund, just with the overall kind of market evolution, we decided to raise a slightly larger fund that fund is actually now majority investing in China and the US being kind of the second largest area that we look at, and then Japan and then rest of the world.
Erasmus Elsner 5:18
Interesting. I mean, with the 780 million fund, one could have also thought about, you know, raising a separate Growth Fund, but you’ve decided to sort of keep it in one vehicle, right, and then reserve, maybe maybe a larger portion of the fund to later stage rounds. But definitely interesting how this has shaped out maybe let’s talk a little bit about differentiation, which is always a big topic in venture, right. As I mentioned, you’re really one of the few firms that can really claim to have a long track record in both the US and Asia, I remember this episode from the acquired podcast, I don’t know if you’ve been a listener, but there was definitely owned from Sequoia who talked about, you know, setting up the Sequoia China offices, and it was all very much an expansion mode to Asia, do you feel that it gives you a key advantage to be sort of global natively giving you an advantage and like seeing some tech trends earlier, maybe bring companies to the US or the other way around?
Kyle Lui 6:14
It is a competitive advantage for us. I think that managing a globally distributed and investment team with on the ground people in different time zones and geographies is not an easy thing to do. And I think that we’ve managed to do that really well. And it’s kind of part of our secret sauce, like, what’s the right level of not in personnel, but traditionally in person collaboration on deals given that, you know, we’re focused on different geographies. And so I think that we do a particularly good job of that, because it’s in our DNA in terms of trends. For the first 10 years, when we were investing in Asia, a lot of the advantage was really in the knowledge arbitrage from the US innovation going to China. So what are the latest trends in the US? And what are the things that are relevant for China, the last five to eight years, we’ve seen information transfer both ways in which we’re seeing, particularly on the consumer internet side social ecommerce payments, and some parts of kind of applied AI, we’re seeing China, really leapfrog the US and we’re seeing a lot of trends happen there at the same time, or even earlier than the US. And so there’s a lot of learnings from our US team.
Erasmus Elsner 7:28
Super interesting how you talk about this dynamic shifting from the last couple of decades. And I’ve just recently started listening to this tech bus Asia podcast and learned so many concepts that aren’t really around in the US, for example, group buying, it’s quite interesting how this concept may apply in the US as well, mutual pollination of ideas and concepts.
Kyle Lui 7:49
And the Japan angle, which is, you know, I think quite unique to us. Japan as a venture market is much smaller than the US and China but from a tech and IT spend perspective, is the third largest market after the US and China. And so it’s a very strategic market for us and the Japan team, because there’s a relatively shallower venture capital base, especially those are kind of silicon that operates second Valley, they get the advantage of the knowledge arbitrage from both the US and China. And so in the Japanese market, we actually do a lot of incubations were invested in a company called free. We were the founding investors, we worked with them from day one to start that company. And you know, that’s now a four and a half billion dollar publicly traded company on the Tokyo Stock Exchange for free for those that are not familiar is a combination of an online QuickBooks plus kind of payroll all rolled into one for SMBs. In Japan.
Erasmus Elsner 8:46
Maybe let’s talk about the recent role that DCM has been on and you mentioned in a recent interview that your firm has generated a 61 G mike on the investments that have gone public in the recent two years and that’s just a spectacular. You mentioned one deal, in particular the cashew, which was a 260 G Mike transaction which really puts it on par with really the biggest of the biggest excels Facebook transaction, Sutter Hills snowflake transaction. This has been a crazy ride in the last couple of are the last two years I would say you mentioned companies like Bill dot COMM But also hims and hers, maybe talk a little bit just about the recent role that you’ve been on.
Kyle Lui 9:30
Erasmus Elsner 10:53
Wow, it’s just an amazing, it’s an amazing ride. And it’s another overnight success, 10 years in the making. And if you get to this harvesting phase of a fund that it’s always great to see the liquidity events rolling in like this. But maybe let’s now take a step back. One thing I found extremely interesting about your background is you have a lot of venture capitalists who claim to have seen both sides of the table, having been a founder and then becoming a venture capitalist. But you’ve actually seen all three sides of the table because venture capital really sits between founders serving founders, first and foremost, on the other side, they’re also serving LPs, and you’ve been on the LP side with pantheon. I think your last role was as head of Asia Pacific doing secondaries and direct co investments, maybe talk a little bit about the Apoc world of LP investing?
Kyle Lui 11:42
Yeah, thank you for the question. And yeah, I don’t get this question a lot started my career on the LP side, a lot of my friends were going into investment banking, I was a little more contrarian and said, there’s this analyst programme, happy on to your programme, similar to banking, but it was doing private equity secondaries, which at the time was a super niche industry, essentially buying portfolios of venture capital and private equity stakes from other limited partners. But as part of that side, also really saw the primary fund investment side we at the time and recently started co investments. After two years, I was promoted to an associate move to Asia to help expand pat downs, Asia, franchising, I had a fantastic time. I mean, there was a very lean team, really building up the franchise in Asia, I covered you know, Japan, down to Australia, India, China, being based out of Hong Kong, during the really like the boom of 2006 to 2000, mid 2008, and then the bust of like, 2008 2009. And so seeing that cycle was was really valuable. And then after that, I came back to the US and went to Harvard Business School, and it was really at at HBS. And I think there’s a common misconception that MBAs are not entrepreneurial. I was part of the now quite well known class of 2011, where, you know, we entered in 2009, which means we applied to business school in 2008. The founders of my class include the founders of grab, go Jek Stitch Fix, Biggs co Peng, Oscar rescale, actually received from Doc Sen was a classmate of mine, and the list goes on and on, I think, in venture and actually in life, like a lot of it is about timing. And I think that it just so happened that, you know, we’re coming out of the great financial crisis that mobile was starting to really take off in hindsight was a fantastic time to start a company. You don’t know that until years later. And so I did not go on the, you know, start my career at Pantheon thinking that I would end up being a VC or that I would end up starting a company. I mean, I was thinking, hey, for the first couple years, this is a great, great firm and a great programme, and I can I can learn finance and investing.
Erasmus Elsner 14:00
Yeah, that’s I think that’s, that’s super interesting that it has given you probably, it has shaped your perspective on how to LPS fewers. It’s great to have seen both sides, I guess. Now let’s talk a little bit about choice paths, choice paths. It was an early enterprise SAS company, if I understand it correctly, you were helping employees to discover and redeem company sponsored perks, and maybe talk a little bit about what you were trying to accomplish there.
Kyle Lui 14:26
We raised a seed round from some great seed funds and angel investors. We were in the process of raising our SUSE go to a few folks, including Salesforce, the time Salesforce was really looking to expand their HR cloud and had recently acquired a company in Canada called ripple. And there were some functionality around rewards and recognition side that they were looking to expand. And so we really looked at the acquisition by Salesforce as a continuation of our vision. There are a lot of features actually that we built that choice paths that were really Around tying recognition to real world rewards in a way that’s kind of like an early kind of fintech. So, some of the key features that we built was the ability for the democratisation of reward. So a non quarter, caring people to get incentivized and rewarded for closing sales as part of that the ability for people to bend those rewards on their personal credit cards and get credit resettled automatically integrating with some of the early API’s of like first data, so sort of like acting more like the early FinTech company, but it was before the days of fintech. So we’re software, yeah, financial software.
Erasmus Elsner 15:36
And then you spent some time at Salesforce before you made your way to DCM. And maybe talking a little bit, I think it’s quite interesting for people to learn how starting out at a venture firm really works. You mentioned you had a great network of founders from Harvard Business School. Today, we have this notion of the career of venture capitalists, you definitely weren’t one of them. But we have these people who join as associates, you know, really work on the top of the funnel, talking to a lot of companies moving on to become a principal, you know, taking more ownership in the IC and the decision making process. And then last but not least, making your way to partner but I think it’s quite difficult for people to understand how, you know how how this transition really works. A lot of, you know, people come in as partners after having done a lot of angel investing, maybe talk a little bit about these five years before becoming a partner.
Kyle Lui 16:29
Yeah, absolutely. I joined DCM as a principal principles that DCM are fairly senior can sponsor and lead deals and sit on board. Even more true. Obviously, at the partner level, DCM was a very traditional way of looking at titles at DCM principal is a partner and training come in, and you’re building trust both internally, as well as with founders and portfolio companies. And as you start to build a track record, then you’re promoted to partner. And I think that over the last, you know, five plus years, a lot of venture firms have moved to giving essentially everybody partner title. So it’s unclear who are check writing sponsoring partners who can sit on boards, and who are folks that are doing deal sourcing, but may not necessarily be able to write their own checks. And so that’s not how DCM works. It’s true that like as a as a principle, like, you know, you’re not at the highest levels. And so there’s a lot of trust that needs to be built. There’s more mid level within a venture firm, and the winning deals and sourcing great deals and having promising companies is a really important part of getting promoted
Erasmus Elsner 17:37
before joining DCM did you do some angel investing,
Kyle Lui 17:41
I did start angel investing while I was at Salesforce, but it was not for the intention of moving into venture I was doing it because I had been an entrepreneur before. And I had deep founder empathy. And I would meet companies with like great founders or problems that I was passionate about. And I was interested in investing. And because of having been a former founder, when they’re sort of like other founders, particularly at the time, like more enterprise because I was at Salesforce, I would get a lot of deal flow. And so I would introduce a lot of VC firms that I knew from the time that I was an entrepreneur, and introduce them to a lot of VCs. And so I guess that was things that VCs looked for. That wasn’t necessarily, you know, the reason I did it, and the whole moving into venture thing was, in my mind actually moved from what I had intended on doing because I was really kind of focused on starting my next company after Salesforce.
Erasmus Elsner 18:35
Yeah, I wonder what the blended return would have been if you had just blindly invested in all your classmates at Harvard Business School, it would have probably been the best thing. Yeah, even better than DCM is recent returns?
Kyle Lui 18:48
I think it’s I think so yeah.
Erasmus Elsner 18:50
Quite impressive. The list. Okay, let’s, let’s talk a little bit about some recent deals. And I mentioned at the top of the show that I had one of your founders, and as I just learned classmates from Harvard Business School on Ross Huddleston, from ducks, and who had a great exit, just recently, two or three weeks after being on my show to Dropbox. And I remember that Ross told me during the interview that actually the round from DCM on CrunchBase it looks like it was a bridge round, but it was actually a pretty competitive round. It might have had something to do with you having a good deep running connection with with Ross before, but maybe talk a little bit about this round about being part of this great journey with ducks. And
Kyle Lui 19:32
so Ross and I have known each other since business school, I was really making the transition to tech and he was you know, somebody that studied Computer Science at Stanford and then worked at Microsoft and an intern at Dropbox and started a company that was acquired by Facebook and so he really kind of helped me just understand tech more when we were in, in business school and then I and then I started the company and then he was at Facebook. So he was at a big company and I was starting a company. And when he decided to leave Facebook and start docs, and he had approached me, I was at Salesforce at the time, talked about the idea, we kind of, you know, brainstorm things and, you know, stayed in touch really through the years. And then when I became a VC, you know, I’d always been interested in Doxon, they were starting to really break out, but the company is very capital efficient, they were not like in need of additional capital, they had gotten term sheets, you know, much larger rounds. And ultimately, the reason it was 5 million and DCM was the only check in there. So the existing investors couldn’t get the pro rata because it was a formula of like, trying to get as much ownership as we could, given that the company didn’t need a lot of cash. And so we actually gave them the option to raise much more and we wanted to put more money in but like, they didn’t need it. And in the end, they were right, because they didn’t touch the money that we put into the company for 18 months.
Erasmus Elsner 20:59
So crazy. He’s such a Pegasus, I told him on my show, he’s such a Pegasus, it felt like he was bootstrapping on an A for years. He’s an amazing founder.
Kyle Lui 21:08
I mean, Doxon wasn’t actively looking to sell the business was cranking, well, it was profitable, it was growing nicely. And that growth is accelerating. You know, ultimately, I think there was a lot of shared vision with Dropbox, they had other acquisition offers as well previously, and also, you know, competitive to Dropbox. And ultimately, we’d like to pride ourselves as being very much a founder friendly, very founder friendly and supportive what the founders wanted to do, and ultimately thought they thought it was the right move. And so we’re supportive of it. Yeah. And yeah, it was a great outcome for for everybody. But yeah, I mean, I wouldn’t be surprised if you know, next company, rust start, there’ll be a billion dollar company,
Erasmus Elsner 21:46
I wouldn’t be surprised either, maybe let’s talk about another company. And if I think about the spectrum of being like hyper capital efficient versus being like capital intensive, I couldn’t imagine a company that is more capital intensive than lime, which has been in the midst of the macro mobility, Scooter wars, and you’ve been really part of this journey very early on, you know, coming into the first I think, institutional round with Andreessen Horowitz,
Kyle Lui 22:11
I mean, that we invested with Brad and Toby when it was just a PowerPoint and a pilot programme with a dozen bikes in Seattle. And it was really about, you know, our learnings from the China market and what was working and what was working, we didn’t end up investing in any of the bike share companies in China. But there’s a lot of learnings there, when initially live bike came out was like this can definitely work. There are a few different dynamics here. Number one is much higher willingness to pay. Also, the general competition was really more of these public private partnerships. And these kind of bike share companies that were pretty kind of old school, not using a lot of technology. And so we’re really excited about the vision and the founders, and then the micro mobility movement, it just took off. And so it was really this roller coaster, from, you know, the huge peaks and then be troubles that sort of started really, you know, like, honestly, a bit before COVID. But certainly COVID was a huge factor as well, lime had to shut down 95% of their markets, because of the shelter in place around the world. There was also this vision, that line was going to be a global company, and that they were starting in the US. But we very quickly realised that the European market is super attractive because of the infrastructure that had already been built up and the usage of you know, bikes and bikes and scooters. And you know, I’m still a huge believer in the micro mobility movement, I think, you know, one of lions key competitors just announced they’re going public with SPAC and while I can’t like disclose the line numbers, you know, they are materially larger than than bird. So I’m excited to kind of see what happens with the company about four.
Erasmus Elsner 23:57
So maybe let’s talk about the last transaction, which is really combining couple of trends, telemedicine with direct to consumer hims and hers. If I think about the why now slide for this company. I think an important fact is that the Viagra patent expired by the end of April 2020, which really created this opportunity for direct to consumer companies to move into this space and to tackle this niche problem and that very few people like to talk about establishing itself as a lifestyle brand putting this positive spin on it. I think the company’s back in q1 of this year, talk a little bit about hims and hers. What’s the story behind it? How are you involved?
Kyle Lui 24:37
Yeah, the HIMS. And hers investment is a little bit of a typical investment for us, like 82% of the capital that we invest is at the early stages as we define seed to Series B and HIMS. was a little bit late later than that but we saw just tremendous upside. Andrew was incredibly compelling founder the retention on the products that would be profile of The user base was incredibly appealing. And so we saw tremendous upside, even in a growth round. And, you know, the company went public recently, we continue to be shareholders, we continue to see the upside, even as a, you know, as a public company, there’s a covenant Miss misconception that companies like hims earn a tonne of cash, but now that their financials are public, you can see that they’re actually very cash efficient. I think the year prior to going public, they burned something like $10 million, collectively for 2020. You know, it’s a model that I think, has been replicated in other parts of the world. Now, there’s been a lot of vertical solutions and direct to consumer vertical telemedicine, which have come about but you know, I’d say Kim’s was really one of the early pioneers in combining telemedicine with the prescription side and the ongoing kind of delivery of the medications, combining that also with building a lifestyle brand that people feel good to be associated with. And so I continue to be very bullish on the company.
Erasmus Elsner 26:04
I mean, there’s there’s been a lot of talk about the digitally native vertical brands and direct to consumer brands that they’re spending a tonne of cash on, you know, CAC, and really having really difficult unit economics when it comes to scale, what I think is interesting about HIMS, and hers, you still have this friction of the prescription. So customers even if you drive traffic directly to the site, there’s still some level of friction, maybe talk a little bit about how you thought about this,
Kyle Lui 26:32
while people are going on to the sites because they have a problem, right? They’ve heard about, you know, his or hers or others as a online solution to solve their problem, you know, where investors and usually which is a online telemedicine solution for dermatology specifically focus on anti ageing, melasma and other kinds of skin conditions. They’re doing tremendously well. There’s a lot of people who have issues with their skin and they hear about muesli they hear that they have you know, interesting compounded solutions, you know, medical grade requires a prescription. And so I think that market is only going to continue to grow. I think one part of our thesis around investing in hymns and the muesli and also a company called tiempo, which is a digitally native AI trip in fitness studio, which launched during COVID Key, here’s the consumer subscription part, just like the move from client server to SAS, lead to a lot of you know, the evolution of an entirely new now, massive category in enterprise software COMM The same thing is happening in consumer, whereas, you know, 510 years ago, it was all about that individual transaction, getting economics to work. And then if the users come back, then that’s all gravy for you. But you have to make the economics work on the very first transaction. With consumer subscription, there’s an ongoing relationship with customers, you want to keep them happy over time. And so a lot of these companies that we invest in, have a kind of ongoing subscription component to it, which makes the economics much more appealing,
Erasmus Elsner 28:01
you’re thinking about repeat purchases for erectile dysfunction, it’s definitely on the higher LTV compared to, let’s say, leggings or crop tops. And so as we’re running against the clock, talk to us a little bit about where people can find out more about you and what you’re up
Kyle Lui 28:19
to. I am proud to say that I spend a lot of time with entrepreneurs with the founders of our portfolio with the exact so I don’t have a lot of time to like tweet or post things. But I am very responsive on LinkedIn and the things that I post on on LinkedIn. We also have a medium page where we’ve talked about some of our latest rankings, we are planning to start being more active on on Twitter, but particularly around just insights, sort of like snackable data trends that we’re seeing, especially from a global lens. And so that will be coming out soon around around sort of like DCM but the areas that I’m really excited about and spending a lot of time on, I’d say the two key areas FinTech next generation FinTech applications. I’m really interested in embedded lending where you can leverage the existing customer bases of software providers or b2b marketplaces to provide FinTech solutions to their end customers. I’ve been spending a lot of time at the intersection of healthcare and software, which is an evolution that DCM has been focused on for a number of years now. And then also anything touching software in the E commerce vertical because I think it’s only going to continue to explode from here with the behaviour changes that we’ve seen with COVID.
Erasmus Elsner 29:33
You personally, your main focus is on the seat programme, if I understand correctly, you’re ahead of the seat programme and the seat fund.
Kyle Lui 29:41
So this was a very lean team. We have 18 investment professionals globally. We have four key investors in the us including myself, covering all sectors from enterprise software, consumer, digital health and fintech. And so we have a very broad mandate and there’s a lot of stuff for Syria, so my focus is on seed to Series B, I’d say amongst that the sweet spot actually is Series A, but with the, with the recent market activities that’s kind of driven us to move a little bit earlier stage, we spend a lot of time at the seed stage these days, probably not the first round like the angel or seed round, but we do spend a lot of time at the institutional seed round where companies are raising call it two to four or 5 million.
Erasmus Elsner 30:26
Yeah, that’s great. And it’s it’s the most time intensive phase of the company work where the founders need the most hand holding. And it’s great to hear that you’re not spending too much time on Twitter, because a lot of people on Twitter VC, Twitter, it seems they have the feeling that if you get to 20,000 followers, you automatically get a job at a VC firm. So it’s great to see that you’re really focusing on on the founders and really making sure that you’re supporting them first and foremost. So yeah, Kylie, Kylie, thank you so much for taking the time and being with us here today.
Kyle Lui 30:56
Yeah, thank you for the great questions, and I really enjoyed this interview and yeah, looking forward to stay in touch