Editor’s note: In Sik Rhee is a General Partner at Vertex Ventures US and a former serial entrepreneur and advisor to inception-stage enterprise technology companies. At Vertex, he partners with very early-stage founders to help build their companies, scale their products, and hire their executive teams. Prior to co-founding Vertex Ventures US, he was a General Partner at Rembrandt Venture Partners and a Venture Partner at Accel Partners.
Can you tell us about your background and path to co-founding Vertex Ventures US?
When I was a kid, I spent a lot of time building computers and learning how to program. Those interests eventually led me to pursue a degree in electrical engineering and computer science at UC Berkeley and to go on to found a startup called Kiva Software shortly after graduating. Kiva created the application server market and powered first-generation websites for companies like E*Trade, Bank of America, and Wells Fargo. After it got acquired by Netscape in 1997, I went on to found a second company called Loudcloud that jump started the data center automation software category before IPOing in 2001 and subsequently getting acquired by HP in 2007.
From there, I transitioned into investing roles at Accel Partners and Rembrandt Venture Partners, where I did a lot of work incubating companies. Then in 2014, a former colleague of mine named Jonathan Heiliger and I decided to start a boutique venture fund focused on enterprise software and infrastructure, two areas where we both had deep experience and expertise. In the end, we opted to join Vertex Ventures and launch its presence in the United States.
What can you tell us about Vertex Ventures and your investment strategy?
Vertex is a multinational network of funds that originated outside of the US and that has outfits in Southeast Asia, India, China, and Israel. Here in the US, we support early-stage founders of enterprise software companies and provide the majority of our funding at the Seed and Series A stages. We focus exclusively on enterprise software, which is an area that requires a deep understanding of how companies operate and work at scale. That’s something our team has, given that we were all previously either founders or operators ourselves.
One of the reasons we like enterprise software is because large enterprises are not only very clear about what their pain points and bottlenecks are, but also happy to tell us about them. That means that rather than having to guess what a particular enterprise’s top spending priorities are, we just have to know who to ask. When you consider that 80% of what’s so hard about starting a new company boils down to isolating the right problem sets to solve for, that’s a huge advantage. Our strategy is to identify the right enterprise problems faster than our competitors, and then match them up with the best enterprise operators working to solve them.
What tech trends are driving Vertex’s investments and can you tell us about any of your portfolio companies and how they fit into those trends?
We’re more thematic than dogmatic when it comes to investing in particular tech trends. That said, there are waves of technological transformation every 5 to 10 years and the current wave driving a lot of our investment activity is how cloud adoption is transforming the ways we procure and apply technology in our daily lives at both the consumer and enterprise levels. Of course, cloud transformation is a very nuanced problem. We don’t want to invest in things that will eventually get commoditized and wind up getting crushed by cloud vendors. Instead, we’re looking for true innovation and solutions that can flourish with them.
We spend a lot of time looking at cloud native companies. One example from our portfolio is a feature management platform called LaunchDarkly. As enterprises started adopting cloud, they began to see it as a faster and more agile way to get their solutions out to market. What would hold them back, however, was the fact that it was hard to experiment, release new products, and launch quickly and repeatedly. LaunchDarkly gives them that capability, allowing companies to deploy with confidence and push new features into products much faster and easier. In effect, LaunchDarkly allows enterprises to do what hyperscale companies like Netflix, Uber, Facebook, and Amazon were already doing thus helping to level the playing field.
Fundamentally, we look for trends and patterns that have been borne out at hyperscale companies and that can then trickle down to enterprises across a variety of areas, including cybersecurity, automation, data management, and data governance, among others.
What advice are you giving founders to help them navigate the current macroeconomic environment?
I tell them that what doesn’t kill you makes you stronger. Right now, a lot of companies are having to make tough choices as they look to streamline their business and become more efficient. While not all will survive, those that do will come out a lot better on the other end.
I also like to remind founders of the importance of staying focused. In bull markets, they often believe that they can do more than one thing well and wind up spinning out second or third companies or launching multiple product strategies. No matter how many opportunities they have in front of them, it’s always best to choose one strategy at a time to focus on and to do it well and obsessively. The founders who maintain that focus will be the ones that survive and thrive going forward.
Finally, I’m encouraging founders to revalidate their assumptions around their go-to-market strategies. In many cases what worked two years ago just isn’t fit for purpose now. The growth- at-all-costs mentality of aggressive spending far ahead of results has been replaced by the need for efficient growth. Founders that are doing well are constantly conducting experiments and iterating quickly so that they can adapt to the realities of the current environment. There’s far more scrutiny on both the RevOps and FinOps functions at all startups. Those who fail to innovate and adapt won’t make it.
In your view, what’s the key to creating software products that resonate with enterprise customers?
In large part, it comes down to understanding whether enterprises are playing offense or defense. Enterprises always want resilient, robust, high-performing, secure, and reliable software products. But in the pre-Covid era, they also wanted capabilities that would allow them to play offense better so that they could grow their market share faster. I’m talking about things like sales enablement, marketing automation, HR tools, or anything else that would help support their growth.
Since Covid and throughout the current market pullback, however, a lot of enterprises have realized that they needed to start thinking about taking more defensive steps to drive efficiencies and lower costs. As a result, a lot of the products that were popular just a few years ago are now viewed as non-essential or even luxuries. So it’s really about knowing whether your customers are playing offense or defense and ensuring that your products are aligned accordingly.
You’re interested in how software companies deliver their products. Why do you think open source is so important and what do you see as the key to getting it right?
In the current market, selling is a lot more difficult than it used to be. Thanks to cloud and other innovations, software consumption has increased exponentially around the globe and effectively transformed every large organization into a software company. That means it’s no longer feasible to go knock on doors with your product or service, particularly when companies can go out and find the software they need on their own.
What’s great about open source is that it enables product-led growth by giving developers and others the opportunity to try out your product before they ever spend a dime on it. One of the key takeaways we’ve learned about open source is that customers have to have the opportunity to experience your product long before the sales process ever begins. Equally if not more important is the fact that you have to really create a great product and user experience from the outset to ensure that people fall in love with it and want to become a part of whatever community you’re building.
Over 50% of your portfolio consists of international founders. What advice would you offer to entrepreneurs looking to expand into the US?
The US represents half of global IT spend. If you’re from any other country and want to serve the entire market, then you need to be in the US. The best piece of advice I can offer is how important it is to show up and be present. That’s the only way to really understand how things work in the US, including how software is consumed here and the role that it plays.
One of the key differences that international founders need to appreciate is that American companies have lots of competition and therefore often have huge IT budgets because they see software as a way to gain a competitive advantage. In many other countries, by contrast, there are monopolies and, as a result, the prevailing view is that software is simply a defensive play and a cost center. Anyone looking to sell into the US market needs to appreciate differences like this in the categories and market they care about and tailor their sales efforts accordingly.
It’s also important to hire the right people locally. That can be challenging because the cultural barriers are often much bigger than any language or knowledge barriers are. For example, what do they perceive as exceptional talent and how do they identify it? How do they sell their mission and grow their ambition to attract the very best talent the US has to offer? Some international founders are too timid when they approach that problem. Learning how to overcome that is critical to building an effective, balanced team.
Lastly, I’d stress the importance of starting early. If international founders wait until they’ve scaled up in their local geography, they often wind up having to unlearn a lot of what they’ve gleaned from that experience before they’re able to attack the US market effectively.
Last question: What are you binging right now?
During Covid, I found myself getting into Formula 1. I started watching a few series on Netflix, then built a sim rig at home to practice on iRacing, and have been obsessively following races, drivers, and teams ever since.