Alan Chang is partner and managing director at Capricorn Investment Group, an investment arm of entrepreneur Jeff Skoll (former president of eBay)’s family office. Chang is responsible for a multi-asset portfolio in Asia and other emerging markets and Capricorn’s global venture portfolio.
Previously, Chang worked with early-stage venture investments at DFJ New England and was an analyst at Montgomery Securities. Chang holds a bachelor’s degree from Duke university in electrical engineering, computer science and art history. He then received an MBA from Harvard Business School.
Mr. Chang was named to Trusted Insight’s 2016 Top 30 LP Rising Stars In Venture Capital. He graciously spoke with Trusted Insight on January 13, 2016.
Trusted Insight: You earned a triple major from Duke: electrical engineering, computer science and art history. Not to suggest that anyone must fit into a certain box, but at face value, your studies don’t seem to align with your career trajectory. How did you get interested in finance and end up at Montgomery Securities?
Alan Chang: When I was in college, I had a few internships. One of those was at JP Morgan. That's when I got some exposure to investment banking. I also worked at IBM and Intelsat, a then U.N. equivalent of satellite telecommunications provider.
The great thing about college was that it allowed me to explore all these opportunities, and as you can tell from my three majors, I have interest in many, many areas. From my internship at JP Morgan, it occurred to me that while building circuits was interesting, it was also very interesting to figure out how companies are built.
That's when I started exploring a career trajectory in investment banking, which offered me the perfect opportunity to understand how successful companies were built, how they were taken public and why, or if companies were able to build strategic value in the M&A deals I worked on while I was at Montgomery.
Trusted Insight: Describe your investment philosophy. How did your studies in various areas help form your thinking?
Alan Chang: It turns out electrical engineering and computer science are two majors that focus a lot on logic and looking at foundational parts. But where does art history fit in? Clearly, the study of fifth century Buddhist art probably doesn't fit in specifically. I think the benefit of a liberal arts education is that it teaches you how to learn. It is the conduit through which you learn how to learn, as opposed to learning something very, very specific.
On the electrical engineering and computer science side, clearly, it's about logic. Thinking in systems and thinking in components and thinking in how things fit has worked out very well in a lot of our technology investments that we've made at Capricorn.
Also on the art history side, it lends that macro lens that allows me to look at trends. In very simple words, art history was about connecting the dots. It’s using different works of art at different periods and finding the connection and reading the trends between them. For example, one of the areas I focused on was fifth century Buddhist art. Buddhism was spread from India to China. Overall, the Buddhist statues were changing from a very Greco-Roman style to an Indian style and then to a much more Chinese style. It was about noticing how things change over time, mapping those and trying to find a connection and see a trend.
Art history gives that top-down approach, while electrical engineering and computer science allow for the logical thinking. This allows for building systems and very technical due diligence. These skills are still being used today.
Trusted Insight: You have spent the majority of your career at Capricorn. Anecdotally, it appears institutional investing has a relatively high turnover rate, but in your case that doesn’t seem to be true. Is this a function of your personality, the company or a combination of things?
Alan Chang: I think it's a function of a number of things -- clearly all the things that you laid out, but the best part is that with Capricorn, we have a real focus on investing for the long run because of our structure and the nature of the capital.
It is a place I enjoy a lot, and we have an approach to allocating assets on an endowment model basis for various asset classes, but there is also the opportunity to invest into great companies directly. These include SpaceX, Tesla, Yammer, Twitter, Vitamin Water and the more recent investment in nanosatellites via Planet Labs. There’s a variety of opportunities to stimulate the mind. I think that's the most interesting part.
Finally, because we are part of the Jeff Skoll group of companies and we follow Jeff's visionary idea of wanting all of us to live in a world of peace and sustainability, there's a real focus on investing on a sustainable basis.
Trusted Insight: You manage Capricorn’s portfolio in Asia and other emerging markets. 2016 has a tough start especially in markets outside of the United States. How do you maintain your desired risk-return profile for this portfolio in a market like this?
Alan Chang: It’s a mix of things. We believe that in the long run, we’ll see an emerging class of middle class consumers in a number of the emerging markets. You are already seeing that in China. And you are hearing a lot about that in India.
Taking all these things into account, we remain very committed to the emerging markets in the long run. We think things will go better. We also believe that we have to approach it in a sustainable manner. After all, if you consider the carbon footprint of an average American versus the carbon footprint of someone living in China or someone living in India, and then think of how economically these countries will grow and that people will consume more. Clearly, there is not enough of a resource base in the world to accommodate this type of growth over time. I think it’s going to be very, very important to find a way to invest into, let’s call it, the sustainable emerging consumer in these countries.
As for the year 2016 and how we are positioned, we have fortunately performed very well in 2015, but on an annual basis, we actually don’t move the needle that much. Because of the nature of the capital and how we invest, we tend to focus on finding the right companies and the right managers to invest in these regions. These managers and companies have always exhibited an amazingly a high degree of resilience versus the local markets, especially when the local markets are seeing volatile times.
For us, it’s about finding the right managers and the right companies and sticking with them for the long run.
Trusted Insight: Your educational background seems a perfect setup for managing a venture portfolio. What’s your approach to this portfolio and how has it developed since you’ve taken control of it?
Alan Chang: It’s a mix of really great venture fund managers as well as investments into companies directly. These include co-investments or sometimes what we call “reverse co-investment,” where we find the opportunities and then we bring them to some of the funds that we are invested in.
For venture managers, it’s really about finding the right people. What I’ve found is that we have been very lucky in having great access to proven, traditional venture managers. We’ve also had great success in some of the emerging managers we have backed. In a number of funds, we have been an LP since fund I, and these very successful funds have been raising funds up to fund III, IV and V now. They have done very well.
Trusted Insight: Q4 2015 was characterized by a slowdown in VC investment, but 2015 as whole was a record year for VC investment. What is your outlook for venture capital in 2016?
Alan Chang: My general thesis is that in years when there are a lot of venture funds getting raised, the returns won’t be as great. But in years when everybody is worried so there is less capital getting raised, sometimes the returns turn out to be better.
Looking back, some of our best-performing managers were in really terrible years, and it so happened that a number of them were raising their second funds. I believe that generally, an emerging managers’ second fund, if they do it right, often turns out better than the first one, as they got their methodology honed down. A few of our great emerging managers who raised their second funds in 2008 were multiples over their Cambridge benchmark. Now, of course, 2008 was also a terrible year for raising venture capital toward the later part of the year given the global financial crisis.
Of course, investing into venture is not a game of averages. Really, the macro trend matters less to us in our daily decision-making process than who it is that we are investing with.
Trusted Insight: What geographies and sectors do you find most intriguing in venture capital?
Alan Chang: We have a little bit of a contrarian streak to us. We also -- because of the vision of helping to find investments and fund ventures that help to create a world of peace, prosperity and sustainability -- like technology or sectors that others may be very bearish about.
For example, we continue to heavily focus on clean energy. We also have a company focusing on nuclear fusion. If we want to invest in great opportunities and take advantage of the long-term nature, one technology area that may be controversial but could have a huge impact if it is successful is nuclear fusion.
Basically, we like complex engineering problems that may at first be a stretch and feel too ambitious, but may end up solving some of the world’s biggest problems. In that case, many of the investments that I quoted you earlier such as Tesla and SpaceX, are the ones that fit this criterion very well.
Trusted Insight: What trends have you identified over time in venture capital?
Alan Chang: One example would be nanosatellites. Nanosatellites, as you have seen, are represented by our investment in Planet Labs. The founders came to us after leaving NASA and said, “Hey, we can launch cell phones into space. We can take pictures with it.”
On the surface, you might think, well, what can you do with this? It turns out that having frequent images for a very, very low price using consumer-style electronics would fit into a core type of disruptive technology, which is now called nanosatellites. You can see a lot of these in companies such as Spire, Planet Labs and a number of other space technologies to capture images. In the example of Planet Labs, an image of the whole world on a daily basis allows you to start tracking agricultural runoffs, deforestation, potentially human trafficking and a number of big world problems that you can start to solve.
Sometimes, though, it is a solution that a lot of consumer technology companies also need. These guys have a lot of commercial customers. In late 2012, I found the team and identified this trend. That was when we seeded the company. Now you not only see a lot of nanosatellites, but also see companies providing services through nanosatellites. Some of these companies provide small rockets or actually launch the small satellites.
You’re seeing an industry transformed from the 60s when people used to build billion-dollar satellites the size of a building. Then these satellites need to be launched by big rockets, and the launch cost is ultra expensive at hundreds of thousands of dollars per kilogram. Now, very, very small nanosatellites like Planet Labs’ are just the size of a big bottle of wine. The total launch cost is exponentially lower, given the much smaller volume and mass, and these are also much cheaper to produce.
Trusted Insight: What’s the number one lesson you’ve learned over time as an institutional investor?
Alan Chang: It’s about staying curious. I think that’s been one of the greatest attractions about my job at Capricorn: the variety of opportunities to get very curious about.
Sometimes it’s about orthogonal thinking. In Planet Labs’ case, the founders’ thinking wouldn’t allow them to prosper at NASA. So they decided to start a satellite/hardware company when the whole venture industry in 2011 or 2012 was focused around social media. That was when Groupon was a hot company and people were focused on flash sales, but it was important to think orthogonally and find contrarian ways of thinking. It’s not staying contrarian for the sake of being contrarian, but trying to find ways to see if you can find a way to -- to borrow the Apple phrase -- “Think Different.”
Also, staying mission-aligned is important. For us, it means making investments that we believe will solve the big problems in the world, but also benefit all of us financially. When you make good choices for the world, sometimes things work out financially as well. That is also a great way for one to stay passionate about work. Find a way to feel very passionate about your work, and it’s a great way to wake up in the morning.
As I often describe, our mission alignment is a great way to get me up in the morning and get me excited about the day ahead. And the endowment-style portfolio allocation approach gives me the “sleep at night” insurance.