Sramana Mitra: I’m asking a question where the entrepreneurs, by definition of the type of opportunity, would not be raising money from the big funds. In this case, the opportunity is not to act as a seeder. The opportunity is to fund some entrepreneurs and then exit straight away.
Jonathan Lewy: I guess that depends on the fund.
Sramana Mitra: That’s what I’m asking. Is this part of your strategy or do you only act as seeders into the larger funds?
Jonathan Lewy: We don’t try to make quick wins. We believe in the VC that really invests in the next big things. It might sound cliche. The only way to do that is if you can raise money from those big funds because you’re going to need that kind of cash to grow.
Sramana Mitra: In principle, the problem is there aren’t that many unicorns. There’s too much money chasing too few real unicorn deals. As a result, there’s a lot of pseudo-unicorns being pumped up with huge amounts of money. The good news is there are a lot of options for entrepreneurs to raise pre-seed capital and seed capital.
As you can see, the Series A gap exists and will continue to exist because a lot of the companies that funds are pumping up to be unicorns are not going to make it as unicorns. That’s where the problem is. If I were in your stage investing in companies, I would look at the other option also of investing in companies and going for straight exits if you can find those.
Jonathan Lewy: Our strategy is to find those unicorns. We have invested with Floodgate Capital who are doing more early stage. They’re also very well connected. It already happened to us.
Sramana Mitra: I don’t deny the value of having a top-tier firm and their network as part of your strategy. The problem is finding unicorn companies that are really going to be unicorns. There’s a lot of delusions of grandeur in the early-stage startup ecosystem. Because there’s too much money chasing too few really great opportunities that are going to become unicorns, you’re inevitably going to invest in a lot of stuff that are not really unicorns.
Jonathan Lewy: I totally agree. In the worst-case scenario that it’s not a unicorn, it’s still a good catch for the fund.
Sramana Mitra: But that is not going to happen. What is going to happen is if you overfund the company, it is not going to find an exit. What I’m saying is there’s a huge opportunity out there of small exits where companies build a product and then maybe go to market through somebody else like by selling through somebody else.
Jonathan Lewy: I understand. I get that there are many funds that are trying to do those quick wins and looking for less risky companies. We are not that fund. It might sound risky but we have analyzed many funds. Usually most of them is by having a few companies making huge returns.
Sramana Mitra: That is the venture capital game. 9 out of 10 fail and one succeeds disproportionately. That has been, traditionally, the venture capital model. If you look at a universal 500 early stage fund while trying to do the same thing or more, it’s mathematically not viable.
Jonathan Lewy: I agree. You need to have access to a special deal flow. You need to know the team enough to be able to evaluate how they’re doing and enter early enough before they raise from top-tier VCs. We are a small fund. We are only six people. Out of the six, we have three full-time engineers.
We develop a lot of tools. We have our own platform that allows us to follow more than 3,000 companies to see how they evolve in time. Everything is automated. I don’t really need to make reports for my LPs because they have access 24/7 into everything we do. It allows us to scale. We can probably look at more companies than other funds because we used technology to do that.
Sramana Mitra: Thank you for your time.