Exclusive Interview with Rajiv Bala

Rajiv Bala serves as a principal at S3 Ventures, one of the largest venture capital firms in Texas, which specializes in early-stage investing in enterprise software startups. Rajiv began his career as an applications manager at a group in Texas Instruments. Rajiv holds a BS in Electrical Engineering and a BA in Economics from Rice University, as well as an MBA from the University of Texas at Austin. During his time at UTexas, Rajiv interned with S3 Ventures in its founding years, and was later promoted to principal as S3 grew to a $325 million firm.

BT (Conor Fitzpatrick): Could you explain your career path? How did you transition from starting after college as an Applications Engineer at Texas Instruments to moving on to S3 Ventures?

Rajiv Bala: I graduated from Rice University in Houston in 2002 with an Electrical Engineering degree, and when I graduated I was considering going into either the applications engineering role or sales. A mentor of mine told me that I could always go from a technical role to a non-technical role, but I could never go from non-technical to technical. I knew that I didn’t want to be in a technical role for my entire career, but I figured that I would go get a solid foundation being an applications engineer for a few years, so I went and joined a small group in Texas Instruments.

One of the other reasons I joined this group was because it was an incubator group, where T.I. would take a few engineers and a business analyst and point them to a market and say, “go figure out if our products make sense in this market.” So we were in the group that focused on digital radio – so if you’ve heard of HD radio, every HD radio sold until 2010 had my code in it. Which was cool, right? The thing is, the ramp on HD radios was pretty anemic, but at the same time we launched products in European digital radio standard, and we built that into a $15 million business for Texas Instruments. So it was very cool to compare the business that was not working to one that was very successful.

Then, after about 2 and ½ years of that, I decided I wanted to move to the business side. I found that product marketing was the best decision based on others’ advice. 

In that business there are only a dozen customers worldwide, because we were selling automotive solutions to the few automotive manufacturers, and in order to sell into those markets we had to have really specific skillsets with the products, so there was greater liability for us. We were selling anything to do with information or entertainment – navigation systems, radios, OnStar-type systems, and hardware and software platforms.

In my role I managed the North American market, which had about 6 customers, so I would pitch them our products and solutions. These are very long sales cycles, so you’re spending a year or more to make the deal, and once a customer gets signed up it takes another year and a half to get everything to production. So it is a super painful process to go through, but the volumes of the sales are millions and millions of units sold in a year, so it can be pretty lucrative.

I would spend a lot of time in Detroit selling to tier-one automotive manufacturers. Our group was a three-person marketing organization that was responsible for what became a $150 million business for T.I. And that’s where I learned how to “sell”, and I learned how to “build” in my earlier years as an applications engineer.

We had signed a few big deals, and then in 2006 and 2007 a lot of my customers went bankrupt, so I went back to business school. I knew I never wanted to work at a big company ever again, so I chose UTexas because I wanted to go to a startup hub and UTexas has an internship program with venture capital firms.

So I decided to learn about the financing side of the startup business and, after business school, go work at startups working on their products. But what ended up happening was in 2007 I started interviewing with venture capital firms, and my current managing director had just raised his first fund at the time for what would become S3, so I decided to intern there and get venture experience regardless of the risk that the new business would fail. Since then, we’ve made 25 investments, raised 5 more funds, we have $325 million under management, and hired 6 more investment professionals, so now we are one of the biggest venture capital firms in Texas. It’s been a fun ride.

BT: What does S3 Ventures do to set itself apart from the competition?

Rajiv: We are Texas-focused. Texas accounts for 10% of the U.S. economy, but only about 2-4% of U.S. venture capital is deployed here, so we see that as a great opportunity to invest in companies. Besides that, we are enterprise software-focused, so 70-80% of our projects are enterprise software, and outside of that we invest in medical device companies among others. 

The other thing that sets us apart is that we are operationally involved in our companies, so once we make an investment we are more consultative with our clients than our competitors. So whether that means they need a new VP of marketing, we’ll give them candidates; if they need a line of credit, we can give them that; if they have sales data and want to find process improvements, we can analyze their data and make suggestions of find them salespeople to scale the business. 

BT: What is your favorite type of project?

Rajiv: There are a lot of insights that you can glean from just the output of a sales database CRM [Customer Relationship Management] system. We have brought this down to a science of taking our companies’ data and helping them optimize their sales processes to grow them more rapidly.

BT: What does the principal role look like in S3 Ventures?

Rajiv: At small venture firms like ours, everyone is doing a little bit of everything. So if you break down my day, it’s probably 40% looking at new investments, 40% working with the existing portfolio, and the remainder is meeting with people that are looking for jobs, or people I’m trying to recruit from other companies to work on our portfolio companies. 

BT: Earlier you said that you knew you didn’t, after your Texas Instruments job, want to go back to a big company. What led to that mindset?

Rajiv: There was actually one incident in particular in which me and another marketing manager from a different organization within T.I. had identified a really big opportunity for T.I. to go after, a $40-50 million per year opportunity. And we spent months working on the business plan, eventually presented it to our bosses, their bosses, and the bosses that both of our organizations reported to. And they said, “that looks great, who is going to do it?” and my boss’ boss said, “well, we’ll give them the software but we’re not going to do the hardware,” and his boss’ boss said “we’ll give them the hardware but we won’t do the software,” and it just died.

So a huge opportunity just died because of political reasons. So that’s the moment I decided I’m not going to be in a big company anymore. In a startup, there is no room for politicking and there is nowhere for bad performance to hide, so startups are a true meritocracy.

BT: What advice would you give someone who is aspiring to go into venture capital? What kinds of skills do they need to cultivate to be successful?

Rajiv: On the technical side, the best advice I got was to get a technical job first, and that has served me well every day in the venture capital industry. That will set the foundation for you to do pretty much anything you want to later on in your career.

On the business / finance side, there are a few different paths to get into venture. There is the finance track, which is to get a job at an investment bank for a couple years and then move into the venture side where you will do models and financial analysis, but not get much operational experience, and then go to business school and end up in a venture firm.

The other way is to work at startups, rise up in a startup to the point where you have a lot of exposure to a venture firm and then get hired into that venture firm. The latter is a great way to do it if you can get into a startup because you will get that important operations experience. It’s like dog years: every year in a startup is like 7 years of experience anywhere else. Being able to have the operational chops makes you a lot more marketable to venture firms at the end of the day.

BT: What is your favorite part of your job? 

Rajiv: I work with the smartest and most passionate entrepreneurs in the world. And coming to work every day – it is super fun to work with that group of people. 

BT: What is the hardest part of your job?

Rajiv: It is probably deciding when a business isn’t working, and making the decision to either sell the business or not fund it further. You fall in love with the businesses, you fall in love with working with these great entrepreneurs, but sometimes the businesses just don’t work. And you can end up throwing good money after bad. And after being so passionate about something, and then pulling back and trying to make a dispassionate decision about whether or not to continue supporting a company – that is really difficult. 

BT: What trends do you see taking place in the Venture Capital Industry? 

Rajiv: Over the last decade, there has been a bifurcation that is happening in the Venture industry. If you look prior to 2005, the distribution of venture capital funds raised by size was pretty flat. Whereas now you see this barbell effect where you have a handful of brand name firms that are raising multi-billion dollar funds, and then you have the small regional firms like us that are raising sub-$100 million funds or $150 million funds. And so that’s creating this situation in which 60% of venture capital dollars raised in funds are going to the multi-billion dollar funds. Because of that, they have had to move to a little bit later stage, and firms like ours are the ones supporting the series A and series B investments – or the really early stage investments. And that is a pretty interesting development over the last ten years, and it’s making for a great opportunity for us, but it’s absolutely changing the industry. 

BT: Do you see this trend as a big improvement?

Rajiv: It is tough to figure out which way the causality is running. Companies are staying private a lot longer and very few companies are going public, so the time to an exit – or to liquidity – is stretching out, and because we’re compensated oftentimes on IRR [Internal Rate of Return] that is a really bad thing. But at the same time, a lot of the big brand name firms aren’t going to Texas for series A investments, so the competition at that level is not as damaging. So I don’t know if this is a good or bad thing, these are just structural changes that happened. But big firms are coming to Texas for later stage investments, so Texas is still getting support from firms on the coasts, which is fantastic.

BT: What are you most proud of at S3? 

Rajiv: Since we’ve started investing in 2007 we’ve made 25 investments, and we’ve created north of 2,000 jobs, and if you look at contractors who are supporting our clients, it’s more like 10,000 jobs. So it is clearly an outsized impact, and that is definitely what I am most proud of.

Rajiv, in closing: Venture capital is a great career path, startups are a great place to start your career, and there are a lot of really fun things that are happening in this ecosystem at large. So everyone move to Texas and let’s create some jobs and companies.