Editor’s note: Lu Zhang is the Founder and Managing Partner of Fusion Fund, a Palo Alto-based venture capital firm that invests in early stage startups that leverage technical or data advantages. Named to the Forbes list of 30 under 30 in 2017 and a Young Global Leader by Davos in 2018, Lu also founded and eventually sold a successful medical device company. Her areas of expertise include medical devices, AI in healthcare, enterprise networks, cybersecurity, and industry IoT. In 2021, she was selected as one of the best 25 female early stage investors by Business Insider. 

Why did you found Fusion Fund? 

I came to the US in 2010 to complete my graduate studies. While at Stanford, I founded a medical device startup focused on testing for Type II diabetes. Although I faced my fair share of obstacles along the way as a young female immigrant entrepreneur in healthcare, I ultimately had a great exit just a few years later. 

After that, I did some angel investing and also briefly served as a partner at a large, billion-dollar VC firm. At the time, most VCs were investing in business model innovation and consumer- facing tech. And while that worked well for them, it was clear to me that going forward many of the big opportunities would be in tech innovation across other industries, especially deep tech and healthcare. I founded Fusion Fund in 2015 because I saw an opportunity to be one of the first VCs to take advantage of that shift. Today, we have close to $250 million under management and recently closed our oversubscribed Fund III, with a focus on investing in early stage industrial, enterprise, and healthcare technology companies across the US and Canada.

What sets Fusion Fund apart from other VCs?

Definitely our sector focus. We were early believers in focusing on tech innovation within specific verticals — in our case, industry, enterprise, and healthcare B2B tech companies with high technical barriers. Another important differentiator is that our entire team not only has deep technical expertise, but also experience in building businesses from the ground up. We understand the life cycles of healthcare and deep tech companies, which differ dramatically from those of consumer-facing tech businesses. We’ve also been highly data-driven since day one, using AI to help inform our investment decisions and even identify high-potential founders before they start new businesses. 

Every quarter we also publish industry research reports on topics like edge computing, network security, space tech, and mental health. As part of that work, we look at all of the technologies that are available and ready for commercialization within those sectors as well as the major players and factors driving market timing. Creating these reports helps us understand big tech trends and whether or not we want to invest in them, while also delivering value to our stakeholders.

There are many! But I’ll highlight three that we’re especially interested in. The first is the ecosystem that has emerged to help large, publicly traded companies navigate their way through digital transformation. While tech companies have been at this for years, big companies in other industries are often just getting started and need help developing the strategies necessary to start monetizing their data. No-code AI platforms are a great example of some of the businesses that are helping make digital transformation easier. We think they’re a game changer because they allow big companies to harness the potential of AI and apply it to their business without having to hire huge data science teams to do so.

Another area of interest for us is edge computing. That’s when computing is done either at or close to a source of data, rather than in the cloud. Imagine a smart speaker that can actually understand what you’re saying in real time, rather than having to relay that data to the cloud for analysis. Edge computing reduces latency, lowers energy consumption, and reduces cloud computing spend. It also helps increase security since it allows personal data to be stored locally rather than in the cloud. Ultimately, being able to transfer and process data faster and get instant feedback will be a huge value driver going forward, leading to massive opportunities.

The third trend we’re excited about is the growing use of technology to help diagnose and treat a range of neurological issues such as depression, dementia, and bipolar disorder. Although conditions like these are becoming increasingly commonplace among people of all ages, the reality is that we have very little understanding about what causes them or how to diagnose and treat them on an individual case-by-case basis. Going forward, there’s enormous potential to leverage artificial intelligence, edge computing, federated learning, and other technologies to help advance the healthcare industry while delivering better ways to diagnose and treat neurological disorders. 

Given what’s going on in the markets right now, how would you characterize the current fundraising environment? 

It’s a challenging time for sure. After a landmark year in 2021, VC activity has slowed down so far this year. Rising interest rates and geopolitical uncertainty mean that some VCs are being more cautious than they were before, even though most have plenty of dry powder. Meanwhile, valuations have come down, which leaves founders reluctant to raise equity right now. Everyone seems to be playing the wait-and-see game. And while the top 10 percent of companies likely won’t have any trouble getting the financing they need at valuations they’re happy with, it’s probably going to be a different story for everyone else.

What advice would you offer founders to help them navigate the current environment?

In times of uncertainty, you have to have enough capital to weather the storm. And I don’t just mean the typical 9 to 12 months of runway. We’re telling founders that they need at least 12 to 18 months of capital. Of course, the goal in having that capital shouldn’t just be to navigate the current volatility and economic uncertainty. Founders should also be thinking about how they can position themselves for growth. That means adopting a growth mindset and remembering that with every crisis comes opportunity. Those companies that are able to not only survive but also thrive during downturns are often the ones that emerge as the winners once the dust settles. 

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Leveraging different sources of capital, such as venture debt, can help ensure companies get the capital they need to help sustain and grow their business, without having to sacrifice as much equity at a potentially lower valuation.

Lu Zhang

It’s important to think creatively about your fundraising strategy in times like these. Leveraging different sources of capital, such as venture debt, can help ensure companies get the capital they need to help sustain and grow their business, without having to sacrifice as much equity at a potentially lower valuation. Mixing financing sources helps to lower the overall cost of capital while giving companies the runway they need.

Lastly, in a challenging environment such as this one, it’s all about making sure that you’re focused on the right things and managing your expenses accordingly. That could mean carefully allocating resources to only those key areas that will help you grow and achieve your critical objectives. In the age of remote work, I’d also recommend building out teams in lower cost locations, whether that’s in another state or in another country. And never forget the importance of embracing diversity. Diverse teams and points of view always lead to better business outcomes.

Thanks for the insights, Lu. We appreciate it.