We generate early-stage alpha: Tech companies have continued to get larger and larger but they are staying private. So many of the VC firms got bigger and bigger over the years to cater to these tech companies which require larger sums of private capital. This shift is what has created the opportunity for Valley Capital to exits — the gravitational pull of ever increasing AUM at late stage VC firms creates the opportunity for a select handful of firms like Valley Capital with the right team and relationships to capture early-stage alpha.
Asthe tech industry continues to evolve and innovate, venture capitalists play a crucial role in driving growth and shaping the future of technology. We would like to hear from these influential figures to uncover their insights, strategies, and predictions for the tech landscape. We had the pleasure of interviewing Stephen Wong.
Stephen Wong, incoming managing partner at Valley Capital Partners (“Valley Capital” or “VCP”). Based in Menlo Park, California, VCP specializes in backing enterprise technology and AI-driven companies at seed and series A rounds. Founded in 2018, the firm has become a leading early-stage venture investor with loyal Limited Partners who actively engage with VCP’s team on deal sourcing, diligence, selection and investment.
Thank you so much for your time! I know that you are a very busy person. Our readers would love to “get to know you” a bit better. Can you tell us a bit about your ‘backstory’ and how you got started?
When I was a teenager my parents moved from the San Francisco Bay Area, where my father was a prominent neurosurgeon, back to Hong Kong. Part of the reason for the relocation was that my parents wanted me to learn and appreciate the culture and nuances of the Far East. They firmly believed that experiencing life and adopting perspectives from both the West and Far East would be edifying for my future, from a personal and professional standpoint.
After I graduated from Stanford Law School in 1992, I soon returned to Hong Kong where I worked for an Asia Pacific-focused direct investment/buyout firm (CCM Capital Corporation) for several years before entering the investment banking industry. From 1997 to 2003 I served as an executive director in the equity capital markets group at Morgan Stanley in Hong Kong where I helped advise and lead a number of landmark IPOs, follow-on equity offerings and convertible bond transactions. But when the SARS epidemic hit Hong Kong, I left the firm to do something entrepreneurial and very close to my heart — write my first book on historic baseball collectibles (Smithsonian Baseball: Inside the World’s Finest Private Collections), which was published by Smithsonian Books in 2005.
In May 2005, I joined Goldman Sachs in Hong Kong where I spent the last 19 years covering many of the Firm’s most important clients in Asia across all major industry sectors, as well as global financial sponsor firms and a number of technology companies in the US. In May 2024, I resigned from the Firm to join Valley Capital Partners as a managing partner and member of the investment committee, where I will help advise and support the extraordinary founders of our portfolio companies, help them expand their reach into the Asia Pacific region, serve as a key liaison for our exceptional LP investor base, and lead our fundraising efforts.
None of us can achieve success without some help along the way. Is there a particular person who you are grateful for who helped get you to where you are?
Without a doubt, my father, Dr. Andrew W.H. Wong. When I was very young and throughout my entire life, he instilled in me a strong work ethic and to never take anything for granted. He was an extraordinary man of deep compassion, empathy and humility — traits that were often found in men and women from his generation. For my birthday in 1998, my dad gave me a copy of Tom Brokaw’s beautiful book, The Greatest Generation, and he urged me to read it not just once, but to re-read it again and again over the course of my life to remind me of the sacrifices that so many brave and courageous men and women made for the freedom we enjoy today. That was his way of reminding me to always stay rooted and humble.
Can you please share with us the story of how you got involved with Venture Capital?
Before my parents moved back to Hong Kong we lived in Los Altos Hills, California, which is in the heart of Silicon Valley. When I was around 13 years old, my parents brought me to a dinner party hosted by our neighbor, Wilfred Corrigan, who founded LSI Logic Corp. My father told me years later that Arthur Rock was at that dinner. Mr. Rock, of course, became one of the pioneers of Silicon Valley and has been credited with introducing the term “venture capitalist.”
So venture capital has roots into my childhood, but I never had the opportunity to really appreciate nor endeavor in it. I was always surrounded by it and it became an ongoing discussion topic with clients and friends throughout my professional career as an investor and investment banker. In 2014, I first met Steve O’Hara, the founder of Valley Capital Partners, in the Bay Area. We struck a close friendship over the years, and I would say that it was Steve who inspired me and lit the “spark” that piqued my curiosity in venture capital such that I would start to give serious consideration to doing it full time if the right opportunity came along some day.
In 2018, while I was at Goldman Sachs in Hong Kong, I met Andrew Rubin, the co-founder and CEO of Illumio, one of the world’s leading cybersecurity segmentation mapping companies based in Silicon Valley. Andrew was just starting to build illumio’s footprint in the Asia Pacific region and I was asked to help Andrew build the company’s customer base and presence in Hong Kong, South East Asia, and Japan. After working with Andrew for so many years, the idea and process of helping and adding value to founders of leading technology companies became extremely appealing to me.
What is your investment philosophy? Can you tell us a little about how you vet your portfolio companies? What metrics are important to you and which ones are not?
At Valley Capital, we take great pride in our differentiated investment philosophy, framework, approach, and culture. We don’t believe in the “high volume” game of applying our capital to a large number of investments with the hope of achieving one or two successful outcomes. We feel this approach is misguided, and leads to complacency and mistakes. At Valley Capital, we inherently are company builders at heart and our culture is to devote substantial time and resources to supporting, advising and nurturing each and every company within our portfolio from start to finish.
1 . Our LPs are an integral part of Valley Capital’s ecosystem: Together with our extraordinary LPs we have derived theses that guide our investment selection process, practice and approach. Our LPs are extremely active with us in deal sourcing, diligence and investment decision-making;
2 . We are disciplined deployers of capital: Given our performance thus far and prominent LP base, we have no shortage of suitors. Despite the significant financial resources available from our our LP base, Valley Capital has kept our fund sizes conservative. This approach differs meaningfully from prevailing market trends whereby most VC firms choose to raise as much money as they can to cover large cost overheads and invest/place bets in as many companies as possible to play the odds. Valley Capital does NOTbelieve in, nor do we deploy, this approach:
(i) We believe excessive capital to company founders dilutes discipline and leads to mistakes;
(ii) We heavily diligence every company we look at by a three-step diligence process we deploy: (1) Investment committee scrutiny; (2) Extensive customer feedback, and (3) Feedback from our experienced LP base;
(iii) We make big conviction bets — we only invest in 8–10 companies per fund with an average check size of $3–6m.
3. We generate early-stage alpha: Tech companies have continued to get larger and larger but they are staying private. So many of the VC firms got bigger and bigger over the years to cater to these tech companies which require larger sums of private capital. This shift is what has created the opportunity for Valley Capital to exits — the gravitational pull of ever increasing AUM at late stage VC firms creates the opportunity for a select handful of firms like Valley Capital with the right team and relationships to capture early-stage alpha.
Can you tell us the story of one of your most successful portfolio companies and the top reasons why this company succeeded? Please feel free to be as elaborate as you’d like.
I’d have to say Yubico stands out thus far. The company was founded in Sweden but moved its headquarters to Palo Alto to raise capital from US investors and to get a foothold in the US market. They wanted to be better situated in Silicon Valley for early customers and go-to-market plans. What’s truly amazing is that they were able to land huge customers so early. The company quickly caught the attention of four industry luminaries to seed the company: Andy Bechtolsheim, David Cheriton, Marc Benioff, and Ram Shriram.
The one key factor that made this company successful was their intense focus on product design. They simply obsessed over this. And because of the team’s maniacal emphasis on design and functionality, they achieved their simple yet lofty mission: to offer the highest level of security to fight modern cyber threats. By the time Yubico was preparing to raise their Series A, the company already had a who’s who of customers and had cemented their reputation for technical superiority and the all-important product-market fit. Name a global Fortune 2000 company — they were very likely using Yubico products. Simply an extraordinary outcome for such a young company.
We were fortunate to have an early seed investor introduce us to the Yubico team, Andy Bechtolsheim, and that eventually enabled us to lead their Series A round with a strong syndicate of investors which included NEA, Andreessen Horowitz and Meritech. Yubico went public in the Fall of 2023 and they continue to grow and innovate.
In your experience, what are the key characteristics that distinguish that portfolio company from others?
Yubico is a story of grit and perseverance, something all young companies can learn from. The company was founded by extremely talented engineers and product designers and for the first few years that really drove the culture and formed the DNA of the company. Engineering was the primary catalyst and drove everything. If you look back on Google’s early years before Eric Schmidt was inserted as CEO, there was a similar dominant engineering culture. While engineering was king and queen, sales and marketing seemed like back burner priorities.
Yubico was always the standard bearer when it came to recruiting technical talent. The engineering and product teams were phenomenal, and there was never a question about that. But the company lagged in sales growth because that intense focus and priority on engineering was not applied to sales. The company went through a few CROs until finally the team realized there was a real problem. After a competitor leapfrogged them in revenue, there was a palpable sense of urgency. To their credit, they acknowledged the issues and made the appropriate adjustments. After an important CEO change, the company found the right balance, the teams coalesced, and sales growth followed. The company made the right personnel adjustments, but it was the cultural pivot that got them on the right track to success. That’s not easy to do.
Given the rapid evolution of technology sectors, how do you stay ahead of emerging trends, and what do you currently see as the most promising areas for investment? Can you share insights or predictions about the next big wave in tech?
This is a constant topic of discussion at VCP. We’re very fortunate to have an active community of LPs — technical luminaries, entrepreneurs, scientists and advisors — who are just as focused on the future as we are. We actively seek out new knowledge on a regular basis to track and anticipate trends in AI, robotics, cybersecurity, quantum computing and more. We want to better understand how these technologies and industries collide and intersect with each other and what new products can be created with these synergies.
AI is unquestionably a game changer for all industries. We’ve barely scraped the tip of the iceberg. Although we’ve traditionally exercised sector discipline when making investments, AI has kind of changed all that. If we meet an entrepreneur who brings a fresh set of eyes to an intractable, incumbent-laden industry or an age-old problem with a compelling use of AI, we want to hear to about. Entrepreneurs can re-wire and completely upend established markets and even create new ones with a novel application of AI. The usual suspects for us are cybersecurity, enterprise software, workflow automation, software development, etc. But what about today’s technological outliers like insurance, education, food supply and development and climate? These AI use cases captivate us. We want to talk to founders with a bold vision for the future and who can imagine the possibilities.
After making an investment, how important is Marketing and PR for making startups a success?
Our view on this has changed over the past several years. We used to subscribe to the field of dreams approach, but things have changed dramatically, from marketing technology to the PR tools available to reach target audiences. So, yes, start-ups should have a PR strategy and GTM plan for marketing and PR. However, it’s a matter of when and with whom. Costs greatly vary and at Seed or Series A, these budgets don’t have to be and shouldn’t be large. However, they should be budgeted. Stealth has its advantages during product trials and the element of a surprise product launch can be effective. However, a carefully crafted PR and marketing plan, if executed properly, can have bullseye accuracy when targeting your customers and market. Start-ups are fighting for attention from customers and investors. But it’s important to remember that a good PR and marketing strategy cannot supplant or veil a weak or incomplete product, and vice versa.
The tech industry faces increasing scrutiny over ethical concerns and societal impacts. How do you evaluate the ethical implications and potential societal impact of your investments? Can you give an example of how these considerations influenced a decision to invest or not invest in a particular startup?
I believe the widespread concerns over the existential threats of AI are well-founded. It would be foolhardy to ignore them. AI is a powerful enabling technology that will continue getting stronger and more effective. If placed in the wrong hands or in an application that can create malignant behaviors in its users the consequence can be dire. Think of the existential problems it can create with social media, especially among kids. The need for social media applications to go viral can come with unintended addictions and behaviors. We already see the damage done today with certain apps. AI can either exacerbate the problems or it can be a solution to stabilize them.
We’re seeing the ethics of AI play out in real time with the rise of ChatGPT and OpenAI’s ever evolving capabilities. Scarlett Johannson very publicly declined OpenAI’s offer to be the voice of its virtual assistant, citing moral conflicts, especially in context of her children. But, alas, their virtual assistant sounds just like her, which opens up another can of worms, legal or otherwise.
For VCP, we like the way AI can solve problems for efficiency in new and unique applications and how it will transform business. We’ve looked at interesting deals where it appeared initially that AI might improve the user’s ability to be more productive at work. Upon closer examination, we learned that the company was trying to use AI to manipulate how the user made decisions and purchased good and services outside of the context of the work environment. We declined investment and walked away thinking this is a dangerous tool that will create unwanted consequences and even encourage addictive behaviors. So that was no bueno for us.
As investors, perhaps one of the biggest challenges AI presents is also one the most fundamental: valuations. My fellow partners at VCP and I are old enough to have experienced the boom-and-bust hype cycles with dot.com, optical, social, crypto, Web3 and now, AI. The road to Silicon Valley is littered with the remnants of over-hyped, overvalued, and over capitalized start-ups. And you wonder if people ever learn from past mistakes? AI valuations were starting to get ridiculous, and it didn’t help that some VCs were willing to participate in this madness and crank out terms sheets with blown out valuations for companies with very little to zero revenue and incomplete conclusions on product-market fit. We deplore such behaviors because the ripple effects it creates shape investor sentiments from VC to the institutional LPs who back them. We like to believe that our disciplined approach to deal making — AI or not — is based on the true fundamentals of the business that can be vetted through proper due diligence.