Links and resources

• Black Opal Ventures – A venture capital firm investing in frontier technologies like AI, bioengineering, and cybersecurity to drive innovation in healthcare and security.
• In-Q-Tel (IQT) – The strategic investment arm of the CIA that funds startups developing technologies relevant to national security and intelligence.
• TigerGraph – A graph database company used to analyze relationships and patterns, originally in cybersecurity, now also applied in healthcare and insurance.
• Arm– Arm is a leading British semiconductor design company that architects, develops, and licenses energy‑efficient CPU, GPU, NPU, and SoC IP platforms powering over 310 billion chips—from smartphones and IoT devices to AI datacenters and edge systems.

Interview Transcript

Shubha K. Chakravarthy: Hello Eileen. Welcome to Invisible Ink. We’re so excited to have you here today.

Eileen Tanghal: Thanks. It’s great to be here.

Shubha K. Chakravarthy: You’ve had a pretty varied, interesting career. I was looking at your profile and we’ve talked about this. You’re a VC now from a very different set of backgrounds. What was the biggest motivator for you to get into venture capital?

Eileen Tanghal: Actually, I never intended to become a venture capitalist. I was an engineer by training and I joined a venture capital-backed startup after MIT. And then, after that I joined another venture capital-backed startup which was in the heyday of the  dot com era. And that company, unfortunately did not make it.

But I had done a transition from engineering to product management and as a product manager, I realized that there was a skill set around marketing and finance that I was lacking. So I went to business school really to be a product manager. And it’s during business school that I was recruited by a venture capitalist for a summer associate job. It was not something I was seeking out. And that, of course, then turned into what has now been a 24-year career in venture capital.

Black Opal Ventures: Mission and Vision

Shubha K. Chakravarthy: So now, you head up Black Opal Ventures and you have your own venture capital firm. Can you tell us a little bit about this firm and your thesis there?

Eileen Tanghal: Definitely. So, at Black Opal Ventures, we are really trying to find companies using frontier technologies for good, starting with healthcare. And it started with this premise that in order to truly find and the most innovative solutions and solve the world’s biggest problems, you need to collide worlds.

Industries in isolation usually stagnate. And so, you need to bring in new thinking, new ideas from maybe a different industry to disrupt what you’re in. And so, that is the premise of Black Opal. My co-founder and I have known each other since our MIT days and for a long period of time, so our worlds really never intersected.

She was a healthcare professional, she was a trained physician, and then a professor in medical school. Then she worked for a startup insurance company. And I’ve always been a deep tech investor and we realized that in about 2019, our worlds started colliding a lot more. So, what that led to is us investing our own money and then starting Black Opal as an institutionally backed firm, really colliding my background in deep tech and semiconductors, AI, materials with her background in healthcare and life science and again, frontier tech for good.

And then specifically in healthcare and security, we are taking technologies which we consider the ABCs of deep tech. So that’s AI, bioengineering, compute, connectivity, and cybersecurity and applying them to improve four Ds. Like, we call this four Ds that underpin health and security and those are diagnosis, delivery of care, drug discovery and development and then defense, like a biodefense.

Trends and Innovations in Healthcare and AI

Shubha K. Chakravarthy:  Interesting. I love the A, B, C, D version of it. So you mentioned this, this collision, right? Are there trends that you’re seeing that are making that kind of collision more likely so that now becomes an opportune time for you to have this kind of a thesis?

Eileen Tanghal: I just gave a talk on this at the Atlantic Health Innovation Day, and I like to point the parallelism between defense and intelligence and the healthcare system. So I didn’t really introduce kind of my background but after I worked for a venture capital-backed startup and received my MBA, I’ve been a venture capitalist at two financial venture capital firms in the UK.

Then I ran the venture capital fund of Applied Materials and Arm, in new business ventures. And then, most recently, I was a senior partner for In-Q-Tel. It is the venture capital partner for the CIA. So effectively investing in defense and intelligence agencies, their use cases. And as I mentioned at the Atlantic Health Innovation Summit, at In-Q-Tel, they have about 800 companies to date, half of which are used in operational use cases that have just saved thousands of lives.

We made all these investments in enterprise companies, field technology companies, and tech bio but really it was against this framework of investments that enable data collection, data interrogation and then action. And the healthcare industry, this is exactly what doctors are doing in caregiving.

They’re collecting data, they’re interrogating that data, and they are acting on it. So of course, anything that you do from an AI point of view for an intelligence agent is highly also relevant to a healthcare professional. We saw this already that was the thesis of the fund. I was doing all these investments in AI, and we knew that it would be relevant in healthcare.

And so I’ll give you some examples. Originally, from a data collection point of view, you’re usually just investing in like novel sensor imaging technologies. Now, with AI, you are turning these sensors and imaging into some things that are much more. They’re smarter because you can put a machine learning model at the edge next to the sensor. So you might have been using that originally for defense and intelligence but now some of our portfolio companies put ML next to the sensor to detect if you are about to have a seizure or if they have to modify your setting so that you don’t get a sore if you’re sitting in a wheelchair too long. So that’s one example of ML moving from one area to another.

On the data interrogation side — same thing. We made an investment in a company called Tiger Graph, a graph database company and originally graph databases were used for cybersecurity and understanding potential threats. They’re now being used by healthcare and insurance to understand the effectiveness and efficiency of certain procedures.

And then on the act side so the autonomous systems side. I made a lot of investments in connectivity and in autonomous systems, robotics. And again, you see that entering the healthcare industry. So it’s highly relevant, this move.

Now I’m talking about AI 1.0, which is for the most part, reactive, simple, still, automated, still requiring a human in the loop. What’s happening now is a move to agentic AI which is going to be much more proactive and more complex and effectively, the human-in-the-loop element is going to get out.

Now, in this world of shortage of healthcare professionals who have been burnt out or just cannot keep up with the waves of information coming in, this idea of agentic AI which allows hospital systems to have a digital workforce and a human workforce, really is going to let them move them into the future.

And so this is going to happen in the next five to ten years, again underpinned by all those frontier technologies that we’re investing in. So that’s why we’re very excited about this space because we see this move from AI 1.0 to agentic AI really collapsing that framework of collect, interrogate, and act without a human in the loop and causing all this efficiency and really addressing the unaddressed problems in healthcare which are a lot of medical errors, a lot of inefficiencies, a lot of patients not having access to care. So that is why we’re excited about this space.

Shubha K. Chakravarthy: You got me excited too. This is actually one of the rare cases where I’ve heard about AI being applied in a really thoughtful manner as opposed to being slapped on on every single business idea I’ve ever heard of. So awesome.

Eileen Tanghal: Thanks.

Understanding Venture Capital for Founders

Shubha K. Chakravarthy: So I want to jump into one of the big themes that we hear with founders is this lack of understanding of what a VC exactly does and what really drives their behaviors. So I want to dig a little bit into that. Starting off, what do you think is one thing that founders most miss about dealing with a VC or about getting VC money?

Eileen Tanghal: So I think I sort of mentioned this to you. Founders are very maniacally focused on what it is they’re doing. So, they kind of see the venture capitalists as like the check writer if they could just convince them to write the check, they can get on with what they’re doing.

But sometimes they don’t take the time to understand what our investor base looks like, what our economics are, how it is we’re going to survive in our own business because we, ourselves are entrepreneurs with a business model and a strategy that we’re trying to execute against. And so understanding, wow well, this firm just started, they need to make a certain return, am I going to be delivering that return if I hit all the milestones? And if they pay this price that I’m asking them to pay? That’s the part that most entrepreneurs really aren’t paying attention to because, again, they’re so focused themselves on what they are doing.

And so they’re focused on their product and their customers, and are rarely focused on the VC’s business model. And they’re sort of just a, “Okay, they’re just going to throw money at me and then I’ll make money for them.” So that’s probably the one thing that I’ve seen.

Shubha K. Chakravarthy: So if there’s one thing, understanding that obviously the founder’s there to take care of their startup and not yours, right? Is there one thing that they can do that you think will make life easier for you and their chances better off to that point?

Eileen Tanghal: Yeah. I imagine that. Just as always we are partners and that are trying to come together to find mutual success. So if you just see your partner as sort of the sugar mommy or sugar daddy or whatever these terrible terms are, then you’re not going to be thoughtful about asking them: what is their motivation? When did they raise their last fund? Are they raising a new one? Why? What’s the strategy? Do I fit into your strategy? The entrepreneurs rarely take the time to ask that of you. Sometimes it’s because there is, of course, a power dynamic. They’re asking you for money, so they don’t want to pry.

I think just a tip might be: when you approach the venture cast, be like, “Congratulations on raising your fund. Congratulations on, actually on some of your great companies. I’ve seen some of the companies you’ve invested in. I’d like to be part of it.” So just doing some more research about who it is you’re talking to and, boy, I really think we would fit with you because you seem to like to invest in this space. Also, I know you all are motivated to do very well. It’s your first fund; I think that I could deliver that for you.

So there’s a little bit of a framing around the needs of the VC, rather than: “I’m just here to convince you that I’m a really good entrepreneur and I have a great product.”

Shubha K. Chakravarthy: So I’m hearing that having that light touch, subtle approach around acknowledging where you are coming from and what your worldview is a good thing and counts in their favor.

Eileen Tanghal: That’s true for your customers, right? It’s so interesting. So the CEOs usually know how to do this for their customers. Even when they’re recruiting employees, they know how to do this, right? So they say, “Okay, please come and join my startup. I know this about you” But when they talk to the venture capitalists, that is not necessarily applied, ? So you often will hear, they’ll contact you, they’ll talk to you, and they didn’t look up, like, how big is your fund?

They didn’t even take the time to do it. How big is your fund? What have you invested in? Who are you? Like, oh, might you like this? They don’t do it. They just again think that 100% job is to just talk about themselves and their company.

VC Decision-Making Process

Shubha K. Chakravarthy: Which brings up a really interesting point, right? This obviously, how good the company is, a big part of your decision process but there’s a whole other set of factors around you, the fund, things that are non startup related. So what are the biggest non startup related factors that drive your decision in whether to invest or not? And can you just talk about how they impact your decision at any given point?

Eileen Tanghal: Yeah, that’s a very broad question. So, there is your own personal motivations and then there are what you have promised your investors you’ll fulfill and then there’s what you have agreed with your partnership. So those are the three kind of layers of what someone is deciding, why someone is deciding to say yes or no.

So I really like cybersecurity deals. I’ve always liked them. This is what I like to invest in. So motivation — check that partner. Then there is the, “okay, I told my investors that of our portfolio of 30 companies, we would do five cybersecurity investments and I’ve already done four of them, so there’s only one left.”

So now that’s going to change if you are the fifth person I’m talking to versus if you were the first person I had a slot of five to fill. So that is kind of that second bucket of what did I tell my investors I would do in my fund. And then third, there’s a dynamic between each partner and the partners together, right? So if you’re in a portfolio of 30 companies and there’s like five slots back and one partner is the one that has all the returns and has done really well. And they want to do a deal and that deal is competitive to yours, then they may win.

So that has nothing to do with you; that has everything to do with a partnership.

So those are outside your sphere of influence. It’s just the partner himself or herself, whether or not you fit into the strategy or at what point you fit into the strategy. And then the dynamic within the partnership itself.

Like other example might be like, okay, this is now the fifth cybersecurity company you’re bringing to us, Eileen and you have lost money on all the other three. Why should I even believe you the fifth time around? And that’s again, you’re going to be a great company but that has nothing to do with you.

Shubha K. Chakravarthy: So that brings, obviously there are a lot of these things and there’s just no way for them to be knowable to a startup founder. So from a practical implication standpoint, there’s the first step which you talked earlier about, Hey, just do the basic diligence and understand what kind of fund this is and what the partnership and the fund is doing.

Check that box. But beyond that, is it fair to say that the actionable implication is make sure that you’ve really scrubbed your list of your target investor list and then it’s a numbers game beyond that because these are all. It’s kind of like college applications in some sense, right? Like you don’t control, you control your application but you don’t control how many people they want from the Midwest and so on.

Eileen Tanghal: Yeah, that’s right. I think that’s a fair assessment. But I think, just like it is possible for you to understand, with all the information out there today what a university cares about, what is the culture of the university. Talk to the people that have attended that university. It is possible for an entrepreneur to do the same thing, right?

Oh, you got funded by this partner? How was it to work with them? Great. Do you think they would even look at us? What is their hot button?  There are people that I remember when I was applying, you barely had the internet. So you bought this book, and then you looked through the book, and then that’s how you decided who to apply to. And then I didn’t even get a chance to visit most of the ones I applied to.

I think in this day and age, you shouldn’t have to go so cold or blind into an investor meeting. You should indeed procure just like universities who is going to be the best fit. And sometimes I hear a lot of excuses that are like, “Well, we can’t afford the database.” It’s like, really? I know, I’m not sure that’s a really good excuse. There are plenty of not-that-expensive databases that give you the lists of investors and what they’ve invested in. And then, of course, they have their websites so you can see what they’ve invested in. And if you really know your space and what you’re doing, if you look at the next 10 or 15 companies in your space and just focus on those and who invested in them, that will also kind of give you a list of who might be useful as investors.

Shubha K. Chakravarthy: Great points. And one last thing on the topic of VCs in general which is this question of returns, right? And how a VC looks at returns. Can you talk a little bit about how you are looking at returns and how the actual returns play out in terms of your overall portfolio and how therefore, how they might influence the decision?

Eileen Tanghal: I’m probably not going to give anything, any new information that you won’t hear from any other venture capitalists. In general, venture capitalists need to be at the top quartile. They have to aim to be at the top quartile. Normally, what that means is that you have to be at least a 4x gross fund and 3x net fund.

What do I mean by that? If you’re a hundred million dollars fund, a gross basis would mean that you have to make $400 million on your investments. Now, if you’re a hundred million dollar fund, of course, you’re charging fees to your investors. So your investable capital might really be more like 80 million.

So it’s like 2% a year on a hundred million is about $2 million. Over 10 years is 20 million. That’s paid in fees. So then you can only really invest 80 and you want to make 400 out of that 80. So you better make 5x out of that 80 million. And then of, what did I just say? 400, right? The reality is, the nice thing is that you then pay back the hundred they gave you, and then you share in the profits.

So, how do I get to that 400 or 400 out of 80? So if I have a portfolio of, call it 18 to 20 companies, which is what Black Opal is looking to do. The reality is like you really can’t afford that many goose eggs or zeros. So maybe you have a couple zeros. if I take 80, this is not what we do, but let’s just say I have 80 companies. I take half of that, so 40 million, and I invest it in 20 companies. That’s 2 million each company and then the other 40, I hold back to back my winners. That’s the normal VC thinking. If I lose, I don’t know like 19 companies, I could probably lose 19 companies, and then one of those companies gets me a 10x.

The thing is, I’ve only put in million plus, maybe some follow-on. So the reality is that that 2 million plus some follow-on, maybe I make 10x on that, so I’m going to get back 80 million or maybe a hundred million. But the reality is then I just invested 80 million just to get back a hundred or a hundred-something million.

So, because I got 19 zeroes and then just the one company hit. And so that’s okay for that one company, and maybe that gets me to 2x. But I gotta make sure all those other companies aren’t zeroes, and they usually aren’t. A couple of them are zeroes, a couple of them are 2x, a couple of them are 3x.

And so you add up all the ones that give you the 2x or 3x plus that outlier, and that’s how you get 5x that I’m telling you. That’s how you get from you investing 80 to 400. Because you’re taking that small like 2 million bet. You’re hoping you make like 20 or 30x on it, which is the 60 or the 80. Then the rest are being added up to get you the multiple, to get you all the way to 500.

And more often than not, you are not the outlier. So now, what I’m talking about are companies that tend to be not in the seed and pre-seed. The death rate or the goose egg rate in the seed or pre-seed is much higher. So it’s possible, , you’re going to have a lot more dying there. But if the seed or pre-seed fund hits with one outlier and they own a lot of it, then that can make up for all the kind of goose eggs.

So there’s like three things happening here, right? One is, at what stage am I getting into? The second is, what is the ownership I’m getting into? And the third is what do I think these things can exit for? And then so there’s one more, which is the death rate, right? So, hopefully that answers your question.

Shubha K. Chakravarthy: It does. And that kind of leads into, this is the backdrop in your mind as you’re evaluating specific companies for investment. And I want to dig a little bit more into that. So I want to go specifically into one, we’ve all understand the piece around the market and the fit and the traction, all that stuff. But I really want to focus on the financial modeling piece because that’s where there’s a lot of fogginess for founder’s perspective.

Financial Modeling for Startups

Shubha K. Chakravarthy: So can you just walk us through like, when you start looking at startups, financial model, what are you looking at and what are the things that immediately are No, the big red flags, the big green flags and some of the yellow flags.

Eileen Tanghal: Yeah. So the easiest way to kind of describe this is to go through the lines of the P&L and then the last part is the starting and ending cash. So, the first thing that what’s in a profit and loss statement for a company. First is the revenues. And are they being realistic about their revenues? Some founders will just say, this is how big the market is and they’ll do a top-down and say, I can capture this percentage of the market. And so, therefore eventually the simplest thing to do is like, it’s a billion-dollar market. I should be able to get 10% of it.

So I’ll get to a hundred million and I will just double every year until I get there. So at the end, it’s a hundred. The year before is 50. The year before that is 25. The year before that is 12, 6, 2, 3, 1. And then they build their business model like that which is a perfectly acceptable way to build a business model.

The part where it falls down is when you start asking them things like what is the gross margin that you’re going to get when you’re one versus 12? And they don’t do the sufficient research to understand what can they really command from a point of view or a price point of view? And then what, from a supply chain, can they really expect from a gross margin point of view? So that’s take number one.

Take number two is you’re telling me you’re going to double your revenues every year to get that hundred million. What is the ratio of sales to your sales and business development team? So your revenues, your sales and business development team—is that consistent? How are you getting there? Sometimes I’ll see founders fall down. In that what they do is they just keep spending a lot more on R&D,and then they like don’t grow sales and marketing heads very much.

And that tells me straight away that this is an R&D founder that doesn’t actually know how to sell a business. Because what they have this mentality of, if I just build it and build it, the customers will come. And so, then they put a lot of money into R&D and development. And then the sales thing is an afterthought. So that’s one thing I’d watch out for.

Whereas the true operator knows that, okay, maybe I have three salespeople. These three salespeople each have commissions of a million dollars each. And then eventually they might have 2 million. And then I have to build out more customer sales reps.

Or the other kind of naive thing that I sometimes see is, I don’t have to bill. I don’t have to have my own salespeople, because I’m just going to sign a big distribution agreement because this is going to be the best thing since sliced bread. And so, anybody who will want to just buy from me. But then what they don’t do is they don’t adjust the margin. Because of course, if someone is white labeling your product, they’re going to squeeze your margin.

So that’s fine, but you better take that into account in terms of your gross margins. So, sales and marketing, what you do in finance called “commons analysis,” which is you take all of the expenses as a percentage of sales, and you look to see whether that’s consistent. So you’re looking to see if you’re overspending in G&A and OPEX, and then like, we go down.

So that gets you to your EBITDA, and maybe you eventually get profitable, and hopefully you do. If you don’t, then I’m not sure what the point of the business is. And then, like, let’s go below EBITDA. So cash that the business needs. In some cases the CEOs, if they are a hardware business or require hardware—they underestimate how much capital expenditure needs to go in.

So you need to put that in, because that’s then going to determine how much you need to raise. And then finally, and this is a little bit nitpicky but it’s rare that their early-stage entrepreneur knows how to project forward a balance sheet and knows how to project forward like, days outstanding on invoices and that kind of thing.

So their cash management point of view, they don’t realize that even if you sell now, you might not get paid till 60 or 90 days out. So you might have a cash flow balance, but that’s already in the advanced territory. We’re talking about usually entrepreneurs that are super early. So, that’s what we’re looking at.

This is just fundamentals of business but using the P&L as a mechanism to inform the questions you ask around the fundamentals of business.

Shubha K. Chakravarthy: To what extent, I’m just curious from a practical standpoint, I’ve seen a bunch of founders not in the same verticals as you and there’s always like  to me it’s a dropout point. Like your financials aren’t there, then it’s clear to me you don’t know what to talk about. Is that something that you see as well? And are the financials ever a rejection reason for a deal?

Eileen Tanghal: I think that they shouldn’t be because accountants may rarely,  very rarely are good entrepreneurs. I know many CEOs that that is not their strong suit at all. What they know is their business, and they have a vision and they can attract people to that vision.

But they’re not very good at the numbers part. It is never a straight no for me, but highly curious person which is what I believe all CEOs should be because we’ll find the answer and learn it or, and try to learn it. So, and if they skimp on that, then that maybe tells you that they’re skimping on other things.

Shubha K. Chakravarthy: So it’s more an indicator of their leadership.

Eileen Tanghal: Yes, it’s, it’s more of an indicator of that and how deeply thoughtful they are. So I don’t expect them to understand the ins and outs of a financial model but if I see them asking a lot of questions and or recruiting the person that can answer, The questions that tells me something about them as a person versus the like, oh, I don’t know that I’ll figure that out later. Or I recruited this person and clearly that person doesn’t know what they’re doing. That tells you, the kind of level of people that they’re able to attract.

Shubha K. Chakravarthy: Interesting. That’s the most interesting take I’ve heard on financial models so far. Thanks for that. So, one other question. You mentioned this whole question of, how they come up with the revenue, you take your market size and, market share is that the only way that you see the market size playing to the financials?

TAM, SAM & SOM

Does it have other implications? For example, where does SAM and SOM come in to the projections and what other checks are you doing to assess

Eileen Tanghal: I mean, I hate to discourage but the kind of amateurish way of doing SAM modeling or TAM or SAM modeling is the— I used to use this as an example— like, what is the total addressable market for blue jeans? Well, easy. The entire world wears blue jeans so I multiply a hundred dollars by the entire world and that is my TAM. Is it, though? So learned a long time ago and I continue to preach it.

The holy trinity of marketing which is segment, target, position. So this is about strategy, right? So, are you really selling jeans to the whole world or are you selling high-end jeans to people that make at least a hundred thousand dollars a year and spend $10,000 a year in clothing and therefore will buy three pairs of jeans?

Now, that is your TAM. So, you have to have some understanding of where the segment you are absolutely going after and how you’re positioning yourself in it. Not everybody who buys a Ferrari is also going to buy a Honda. I mean, you gotta figure out where is your segment and who are you targeting. That’s first.

Then, the second thing is the price sensitivity or elasticity of demand for the people in that segment. Is your pricing that you’re putting together something that they’re used to paying? Because I’ve just told you that’s the volume of demand. Hey, there’s 15 companies or a hundred companies. Now what will they be willing to pay for your service?

Competitive Landscape and Market Share

Eileen Tanghal: And then the third is the competitive fragmentation that’s going on now in the jeans market. Have there ever been anybody that’s collected more than 5, 10, 20% market share? And if they have, can they stay there? Or is it that this is a highly fragmented industry that any player at most is going to get two or 3% market share?

And so you’re using all this. All right, I’ve segmented now to this pie. This pie is worth a billion. The competitor landscape is that there is one big player and there are 40 small players, and we’re going to try to outpace the big player. Fine. And so if we outpace them. We’re going to own five, 10, 15% market share. That’s fine.

And then the next parts of: well, how are we going to outpace them? Well, they charge this much. We’re going to charge this much, but we’re going to offer more value. So there’s more to it than kind of the amateurish, like, “There, everybody wears jeans. Lemme just multiply by the number of people who wear jeans.”

You have to think about this: segment, target, positioning, competitive pricing, route to market, barriers to entry, and then how much it costs for you to get there.

Shubha K. Chakravarthy: So I love all of that makes sense but I’m getting the sense that you really are getting after what is the core addressable market. And I’m hearing less of a concern around the semantics office at TAM. Is it SAM? Is it SOM? Do you have any comments on SAM and SOM versus just the part of the market that you are actually going after?

Eileen Tanghal: Yeah. Again the biggest one is the SOM and SAM, right? That’s where the thinking goes. The TAM to SAM, usually what you’ll see is like, oh, people will include everything into the TAM, and then they’ll realize, like, let’s say I sell sports equipment.

The TAM for sports equipment is a hundred billion dollars. Yes. But of course, you are not selling all sorts of sports equipment. You’re selling a Peloton. So what is the TAM for the Peloton, right? And so then that’s their SAM—sales addressable market—are the Pelotons. The SOM is then the more subtle one that I’m talking about which is where are you positioned in that market, so that it’s really your sales opportunity funnel or your true addressable market. And then how are you positioning yourselves in that? So that is what I mean by kind of the TAM, SAM, SOM. But I’m more interested indeed in the thinking behind it.

Shubha K. Chakravarthy: That makes sense. So you talked a little bit about the revenue, we talked about the model, we talked about SAM, TAM, SOM

Evaluating Fundable Milestones

Shubha K. Chakravarthy: I also want to look at it from the other point of view which is you’re funding a milestone, or you’re looking to fund a milestone. So can you talk a little bit about how you’re evaluating milestones when you’re looking at a company? How do they figure into your assessment and what should the founder be thinking about?

Eileen Tanghal: So again, we are in the business of creating financial outcomes, positive financial outcomes for our investors. Black Opal also an impact fund. So we’re making sure of course that your product is addressing the challenges in healthcare and security.

So I’m not going to talk about the impact part. I’m just going to purely talk about the financial returns part. The fundable milestones for a company usually are around maybe four or five different big milestones in the life of a company. One is when a demo is made. Another is when the company actually has a first trial or pseudo-paid customer.

The second is when it has multiple customers, and then you’re growing. And then five, somebody comes in and possibly wants to buy. You have to decide if you’re going to be bought or keep going. And then even in that end part when you’re growing, are you hitting revenue metrics that investors like to see? So that hockey stick. In SaaS, that used to be like the triple, triple, double, double—1, 3, 9, 18, 36—in terms of revenues. So those are the milestones.

So we put that aside. But remember, we have to make sure that we are getting a certain IRR. So Internal Rate of Return, that gives us the ability to raise our next fund. Because again, I’m an entrepreneur handling other people’s money and I need to return something.

VC Math and Investment Returns

Eileen Tanghal: So the VC math to think about is: if I want to make 30 to 33% IRR a year, which is what I need to do in order to be a top-tier VC, then if I’m going to hold this investment for 10 years, I need to make a 10x return. If I’m going to hold this investment for five years, I need to make a 5x return, and then two years, 2x so on and so forth.

Each of those milestones gets me closer to an exit. So that’s why the valuations can go up, because then I can hold for less time before you exit. So if you’re at seed stage and I think that it’s going to take you 10 years to execute on that hundred million dollars plan, then I need to get a valuation at that stage that still ensures that after you keep fundraising in that 10-year period and dilute me, I can still make 10x the next milestone which might be two years later.

If you want a valuation, it still better be a valuation. After seven years, after I get diluted  can still make 7x. So these are all fundable milestones of when a new possibility for a round is, ’cause you’re executing to your plan. But it has to be a valuation where I can make my IRR  because every single portfolio company that I’m trying to back has to have this potential of 33% IRR in the first place.

Plus, I know that the distribution of outcomes is so varied and wide that even if I do this, I still may not get my 4–5x gross return. Because if you allotted more of these die off and don’t give me those 2xs, 3xs that I’m going to share.

Shubha K. Chakravarthy: So the kind of like, the big message I’m picking up is that there are these four or five big milestones that are going to drive your  prospects of getting the exit that you want to get.

And then where you are in the, in the process determines which of those milestones need to be and therefore what’s the delta or the upside that you have relative to what you need in order to make the returns for your portfolio. So that’s really what it boils down to from, from what I’m hearing.

Eileen Tanghal: That’s right.

Long-Term Capital Planning

Shubha K. Chakravarthy: So with that said, how are you evaluating a company’s roadmap or a plan when they come in and say, Hey, I’m raising at seed stage or Series A or whatever the case might be. Here’s my plan to do the following things and obviously there’s a price tag attached to achieving those milestones.

That’s why they’re raising in the first place. Do you have any thoughts in terms of how the founder should be thinking about those or how you would be evaluating the long-term milestones and the long-term capital plan relative to today’s investment decision?

Eileen Tanghal: So, in every investment that we do at Black Opal, we always take into account the long-term model. Most companies are not necessarily projecting forward like until the exit. Again, these are maniacally focused.

So they’re looking at how much they need right now, how much will they need the next 18 months, maybe the next 18 months after that. We are trying to take them through the whole cycle through exit and we are modeling out how much we actually think they’re going to need, all the way to exits. Of course, they’re more optimistic than we are, in most cases. And then we model the dilution to our investment at this stage from those future rounds.

The next thing we’re doing is we are looking at what exits look like in that space. If they were to hit that revenue or operational milestone. Will they get bought? Who will buy them? For how much? And then we use that to calculate what the eventual IRR will be.

So, that’s what we do. We also do probably like many VCs, three cases: a base case, a high case, a low case. And then we’re weighting them based on the stage at which the company is at. So, in the low case or the zero case, if you’re at seed stage, you might have a very high probability of being zero. So we might give you like a 67%. If you’re already growing, you might have like a 10% probability of dying off, right?

So, that’s what we do. And then we take that weighted cash-on-cash or weighted IRR to determine whether that weighted IRR is meeting the threshold.

Shubha K. Chakravarthy: So, this makes a lot of sense from your point of view and in terms of the business objectives you’re trying to meet. And not a lot of this is actionable by the founder but if there’s one thing that is actionable, given that they should be focused on the business, is there one thing from an exit or a long-term capital plan perspective that you think they should be doing that will improve their odds of success?

The Importance of a Strong Team

Eileen Tanghal: So the venture capitalists try to help the companies with, like, what I call the three main things. So one is customers. The second is capital and then the third which is the part that I think really distinguishes some founders from others, is the people that they’re putting in place around them. And I know this is like everybody is saying the same thing but this is back to the how far out are you thinking here.

So if you say, okay, I’m just trying to get to my first product demo, so it’s just me and I hired a VP of Engineering and once we get the first product demo out, we’re set. We’re now going to go to the market and ask for more money. But what some of the better founders do is that they already know. They assume they’re going to get to that point. So then they bring in as advisors, a list of people that — not necessarily as advisors — but they already have a working list in their head of who they’re going to bring in at that point in time to take them to the next level.

And they’re already saying that to you when they’re pitching. So they’ll say, I’ve got this VP of Engineering. The VP of Engineering right now and I are going to develop this demo. And then, when this demo goes, then what’s going to happen is, this person over here — I’ve already been talking to them — they are going to come over too. And we’re going to hire them and they’re going to sell my demo to 10 of their customers waiting in the wind. I’ve already talked to them about coming on in six months.

That is the better founders are already and then they’ll say, and when we have $5 million revenue, I’m going to take this COO over here or this CFO, who so really wants to join us but we don’t have the capital to pay him or her. But the minute that happens, they’re going to come, and they’ve lined up the kind of dream team to hit all the milestones versus that’s just me and another person and once we get this see look we did it now you’re-going to fund us. Okay, now fund us, then I’ll go find people.

Shubha K. Chakravarthy: So there’s a strong, maybe you don’t intend it, but I am picking up a strong undercurrent of repeat founders here because I already know what’s going to come.

Eileen Tanghal: No, I wouldn’t say that because there’s plenty of people that worked that have never founded companies but they actually have business experience. So if you have business experience and then there’s actually plenty of people that have no business experience but they are deep studiers of other people.

Or they have a mentor that has taught them. So I don’t think you need to be a repeat founder but this is back to me: are you highly curious and are you planning out your whole scenario? Because you can meet a brand new first-time founder but they are thinking way ahead of time. First I’m going to do this, and when I do this, I know I’m going to probably need somebody that does this. So I’m going to start looking for that.

And then I know I’m going to need somebody who does that. So I’m going to start looking for that. But if you are a studier of business and some of my best founders they love to read like, biography books of founders who are successful and they learn from that. So I don’t think it’s that.

I just think it’s: are you trying to have a business or are you trying to make a cool widget? Which one are you? If you’re trying to have a business then you should understand how businesses become successful and not, I’m going to keep talking to you about this thing that I built. Isn’t it cool and da da da. It solves this problem.

But that’s not a business. It’s a product. And so you hear a lot of founders that talk about that and they’ll talk about that for hours, but they are not talking about building a sustainable business. It is like: I build this, this is great, Medtronic will buy it. I build this, this is great, Google will then buy me. And that’s not what I mean.

Shubha K. Chakravarthy: I get it. Exactly. They’re not seeing the dots that need to fall in place before that Google buys them or Medtronic or whoever else buys them. So I think you did a great job modeling that out and laying that out for me. So I want to round this conversation out. It’s been fascinating in terms of  okay, so all of this comes together in terms of somebody coming and making a pitch to you, and you’re going to have to make a decision.

VC Pitch Process and Evaluation

Shubha K. Chakravarthy: For those of our founders who are not familiar with this, can you just give us a high level in terms of somebody pitches, what then happens through the process till the point where you either decide, yes, we’re going to go ahead or we don’t think this is a good fit at this time.

Eileen Tanghal: I mean, it’s very dependent on the venture capitalist, I think. Usually in the meeting, you don’t want to give the wrong impression to the entrepreneur. So if it’s a clear no, I tend to say that in the meeting. So it’s like, look, I don’t think this is for us right now. And I can give a myriad of reasons, but you’re just going to get it.

Now, if you’re lucky enough to say, okay, this has piqued the interest of the person on the phone and they want to find more information. Usually, at least we follow a three-step process where if it’s interesting, we then write a company of interest document that then gets discussed at the partner meeting. And if it’s interesting then we will ask for a second meeting to go over some of the elements which are needed for our next stage in the process which is a “commit to deal,” where you go. A commit to deal means, okay, I’m going to start spending a more significant amount of my time on this company.

Getting to the bottom of these questions I might have. And the questions are always around, for us, like: is this really a big enough market? Are you really the only competitor here with a truly defensible competitive moat? Who are you as people? Do you have any experience in the thing that you’re trying to sell whether it be inside a company or not? Or at least, have you recruited other people around you? Did you put together some piece of technology that gives you an unfair advantage for a long period of time? And then, obviously do you have any sales already in this space?

So those are the five that we’re looking at from a qualitative. And then the easy nos from a quantitative is kind of the VC math which is, what was your last round valuation? Well, my last round was $100 million. Okay. Do you have any revenues? No. Okay. What are the typical exits of companies in your space? Well, there’s this one company that was worth $10 billion. And I mean, the founders love to say that. And you’re like yes but what is the typical exit in your space? Well, $300 million. Well then it’s a no, because if the typical exit is $300 million, you’re a hundred, then we’re finished as much as you might have filled the qualitative part.

So we’re making that judgment call or we should in the beginning of, okay, the valuation is reasonable, we can see our way to the cash and cash that we need. You are meeting our criteria around market, management, competitive tech, sales and I’m going to dig further. But I have to go to my partnership and say, do you agree that I should keep digging further? And then we dig. Then there’s more. Any one of those pieces, the rating changes as you keep digging. You either get better or worse.

And then finally for us, we do full cash-on-cash analysis, which is informed by the diligence. So you gave me some financial model that says you’re going to go from one to eight to sixteen or whatever, and that you’re going to get this kind of gross margins. But I just did a lot of diligence, and I don’t think you’re going to hit that plan. I think you’re going to spend a lot more than you think. And so that’s going to either mute or not mute my original cash-on-cash. But if it’s still on a weighted basis okay, it’ll still make the investment.

So, we do a COI (Company of Interest) to C to D (Commit to Deal)  and then C2C – (Cash on Cash) . We have two levels of diligence that we’re asking for: one at the beginning to get you to the C to D, and then another one that is way more in-depth which is involving the lawyers and other people like IP diligence, reference calls, that kind of thing before we’re making the close.

Shubha K. Chakravarthy: So from a founder’s perspective right there in terms of what the ask is and what I should be doing to improve my chances of getting funded there’s one what I’ll call more,  macro holistic intrinsic factors, which are, am I the kind of leader and am I the kind of business person who’s thinking ahead and doing all of these things that you talked about?

Leaving that aside from a specific deal perspective, are there things obvious misses that you’re seeing consistently that would be actionable tips or insights for founders to better prepare themselves?

Eileen Tanghal: I think it’s just back to like, there are plenty of very, very good businesses. Not all of them should be VC backed businesses. So this is back to the what is the return that you believe an investor can eventually, a realistic return investor can eventually get from this?

Think of this as like a house, right? As much as you take a house in a specific area and you bling it up with all this expensive stuff in the house, it doesn’t mean it’s going to sell for more than what most of the other houses in the area sell for. There is a natural range in of houses in that space.

I don’t care if you put like a gold statue in the front entrances. It doesn’t matter.  You picked a sector, you’re trying to do it. You’re saying that this is the best house on the block, should you really be asking for private equity or venture capital to back this house?

Or should you just run it yourself and just use them. Use your own money or use debt or ask friends and family. It’s not a venture capital thing because venture capitalists need to make 33% IRR.

Shubha K. Chakravarthy: So in some sense you almost have to be an investment style thinker to before you even decide to go down the VC and there’s no business person

Eileen Tanghal: This is back to, are you a business person or are you a person that has a product? A business person is going to know I can sell this many of this. I can eventually sell. Make this much money on this. So, and that’s an equivalent to making this much money for investors.

But I don’t want to say an investor mindset but I do want to say that’s a CEO’s job if they’re trying to raise money, is to understand what they’re going to return to their shareholders.

Shubha K. Chakravarthy: Fair enough.

Eileen Tanghal: It’s like you’re not trying to think like an investor. You’re trying to like think like a CEO. That’s what CEOs are supposed to do. CEOs are not just, I have a product and I try to sell it to my customers. Okay, that’s fine if you don’t take outside investment but the minute you want to take outside investment then you need to take your shareholders into account just like the CEO of any company.

Shubha K. Chakravarthy: Fair enough. Point well taken.

Advice for Female Founders and Underrepresented Groups

Shubha K. Chakravarthy: So one other quick question I want to talk a little bit about to the extent, do you have any thoughts for female founders in this space that you give different or additional advice pointers for them to be successful?

Eileen Tanghal: The only thing that I would say is that it is harder for certain groups, like women, underrepresented founders, even people that — they aren’t minorities or are underrepresented — but they didn’t necessarily go to the right schools. Or I don’t know what “right schools” mean but let’s say the schools that have heavy concentrations of venture capitalists. Their kind of challenge is to get that first money in.

And so, what will sometimes happen is the way that they bring in the first money is such that it actually might make it difficult for a proper, institutionally backed venture capital fund to come in after. So just the piece of advice I’d give is if you’re going to go after the non-VCs in the beginning which is most people — to structure things so that it is conducive to the venture capitalists coming in later. So that’s probably the biggest piece of advice I could give for anyone that doesn’t have the access to the traditional or to the large sums of VC in terms of, is there something specific to the female or underrepresented that I would say differently. Not really. It’s backed again to  this just the people issue, right? Did you think ahead about who else you’re going to bring in after? I think there are some founders who maybe believe that they need to be the be-all and end-all. So they’re going to raise the money. They’re going to do the books. They’re going to do this, and that’s probably not a good sign, right? Because they don’t attract better people than them into their company which is what you need to do.

Well, yeah, I think those are really the two pieces of advice. I will say something just being a female entrepreneur myself. Because it is so hard, it’s also sometimes unfortunate that you end up being on the defensive. Because it’s already hard. And then if somebody’s like criticizing you, then you’re like, “Let me prove myself. Like, let me prove myself again. Like, let me counter whatever you’re saying.” And I would say just be careful of that. So if you’re in the meeting and someone is giving advice or criticizing your plan or criticizing whatever you’re doing and you’re a first-time founder whether you’re I’d say specifically, that is probably one thing that the females, they feel like they have to prove themselves.

Shubha K. Chakravarthy: So then they retort quickly instead of listening or being open-minded about it. Your concept to them is listen and give a measured response back and can ask.

Eileen Tanghal: Yeah. And I mean the person talking to you could be completely wrong and probably they are wrong versus what you know. So if that’s the case, it’s also just not worth debating like, okay, they think that.

Listen and thank you for sharing. But I suffer from this myself. When we were raising for Black Opal and people are questioning our funding stra our strategy, our portfolio strategy, our way of doing this.

Of course, my tendency is to be like I’ve been doing this for a long time. I know what I’m doing. There’s no point in you saying that the investor knows that  what you’re doing or maybe you don’t but I.

Shubha K. Chakravarthy: There’s nothing to be gained.

Eileen Tanghal: Yeah and I think that you just got to be careful about not coming off arrogant or not listening. That’s all. And unfortunately it’s possible that there may be a different bar being applied when you’re talking. So you better just be careful about not coming, not sounding arrogant.

Shubha K. Chakravarthy: I love it.

Eileen Tanghal: Better to sound gracious, perhaps.

Shubha K. Chakravarthy: Good counsel. So this has been a fabulous conversation.  I’m just going to close with one last question. Is there anything that you wish I’d asked but I didn’t?

Final Thoughts and Key Advice for Entrepreneurs

Eileen Tanghal: So you were going to ask me the, kind of the three pieces of advice to give to entrepreneurs. I think so. I had written something down and I wanted to share. Share that.  And so in closing, I guess my three pieces of advice for any entrepreneur is stress test your model assumptions and try to pitch with a friendly investor.

The second is, if you hear the same piece of advice three times from three different investors, you have got to act on it. I mean, VCs are wrong way more than they are right, but there’s usually some sliver of truth. If you’re hearing the same thing, like, gosh, you really might want to get yourself a CFO or, gee, that is a lot of money for that.

If you hear that over and over again then take it into account. And then finally on a fun note is like, get yourself a theme song and psych yourself up when you’re pitching. This is like 99% of the time people are going to say no to you. And it’s, it’s hard right now.

You get on this emotional rollercoaster of like, you’re psyching yourself up, you think it’s going to work and then the person says no. And then you need to sort of pick yourself back up again and try again. So, I have a number of Psych up songs, most of which are by Beyonce. But I would highly suggest that is what any entrepreneur does as well.

Shubha K. Chakravarthy: I love it. I was going to ask and you beat me to it, so you already gave the recommendation. So this has been a fabulous conversation Eileen. Way more than I could have expected. I really appreciate you taking the time and I know it’s going to be a super popular episode. So thank you so much.

Eileen Tanghal: Okay, thank you Shubha.