As one of Silicon Valley’s most prominent lawyers, Ted Wang was a lead outside counsel to some of the sexiest venture-backed companies of the last decade, including Twitter, Facebook, Dropbox, Spotify and Square.
But after leaving law more than three years ago and becoming an investment partner in seed-stage focused Cowboy Ventures, a firm founded by his longtime friend Aileen Lee, Wang is not likely to back a company that would get the attention of his most famous clients. This is because Wang sees the biggest opportunities in software that automates the back office and other functions hidden deep within the enterprise.
He calls this area “unsexy tech.”
Cowboy Ventures is currently investing out of its third fund, a $95 million vehicle that closed last year and is the first fund to include Wang as a partner.
Some of the appeal of unsexy tech companies is that they not only have fewer competitors, but also, most enterprises, regardless of sector, have a need for them, Wang told Venture Capital Journal.
One of Wang’s first investments as a VC was a 2017 seed round into Vic.ai, a service that applies artificial intelligence to automate some of the repetitive tasks in accounting, such as entering the data from invoices, a task that was previously done by hand.
Wang’s unsexy tech thesis is showing promise. This September, Vic.ai in New York closed its $11.2 million round led by GGV Capital, with participation from Costanoa Ventures and Cowboy Ventures.
Other two examples of unsexy tech companies led by Wang are LumaTax, a Seattle startup that calculates and automatically pays state and local sales and use taxes for small merchants, and Fullcast.io, a Bellevue, Washington, startup that helps sales operations with resource allocation.
The need for accounting or tax solutions is not going to go away, Wang explained. “The accounting profession, for example, was around for a long time and it will be around for a long time,” he said.
Another appeal of enterprise software is the predictability of its revenue stream, Wang said. He continues to look for unsexy tech startups serving various operational areas, including legal, HR, compliance and logistics.
Wang, who was previously a partner at law firm Fenwick & West, loved that profession, but was ready for a new challenge. “I was a lawyer for 20 years and wanted to do something else with the next 20 years,” he said “Doing something for 40 years is a long time.”
He has worked with hundreds of startups as a lawyer, but he says investing in them is different and the learning curve is steep. “The worst thing you can do in venture business is to think you understand it,” he cautioned.
What VCs do boils down to three broad activities: “sourcing, picking, winning,” he said. “And of these three activities, picking tends the most challenging for me. It is hard to tell good companies from great,” he said.
The obvious challenge with venture is the long feedback loop. “It’s like learning to play the piano, but you can’t hear yourself play for five years,” Wang said.
For this reason, Wang likes to take extensive notes about his decisions to invest or to pass on opportunities. The idea is that several years later he can review his notes and analyze what in his thinking led to successful outcomes and what didn’t, he said.
He admits that Lee, who was the Palo Alto firm’s sole partner until Wang joined in 2017, still attracts most of the opportunities. Her bets produced 16 exits, including most notably Dollar Shave Club, which sold for $1 billion to Unilever in 2016. Cowboy Venture was also a backed in smart lock maker August Home, which was acquired for an undisclosed price in 2017 by Swedish lock giant Assa Abloy.
The firm used to write checks for about a $1 million but has been writing larger checks more recently. “What we are seeing in the industry is that seed checks tend to be $2 million to $4 million,” Wang said, but declined to comment on Cowboy’s actual check-size range.
As for “unsexy tech,” public market investors and some leading VCs are currently in agreement that software companies generally have higher margins, which means they warrant higher valuations.
And there is nothing unsexy about that.