For nearly a year now, mobile payments firm Square’s stock (NYSE: SQ) has been on the rise. Its recent financial results may not have been spectacular, but the usage metrics continue to impress the market, taking its stock to record highs.
Sramana Mitra: How do you process unicorn mania? Are you chasing unicorns?
Rami Elkhatib: No, not really. Our entry point is either the Series A or Series B. In a Series B scenario, we come in and lead a Series B only if there is a situation where a company has awesome technology but is pivoting or changing its geography. We’re coming in at early-stage valuations. For us, unicorn-type valuations are something that don’t really affect us in terms of our entry into our investment. If any of our companies grow to a point where somebody wants to invest at a unicorn valuation, we’ll welcome that opportunity.
Sramana Mitra: Part of the problem that we see in the unicorn trend is that a lot of companies are getting artificially bloated >>>
Sramana Mitra: What is the geographical distribution of these six companies that you have exited?
Mark Hasebroock: They’re all in the Midwest – from Texas to Kansas City and between the mountains.
Sramana Mitra: Have you sold anything from Omaha?
Mark Hasebroock: No, we haven’t.
Sramana Mitra: It’s interesting. I’ve known for a long time Greg Gianforte who ran for the Governor of Montana. His big hit >>>
Sramana Mitra: The question that I’m constantly intrigued by as I talk to many investors is that how can so many investors find unicorns. It’s just not mathematically viable if you’re obsessed with just investing in companies that have the potential of being unicorns. There aren’t that many of those.
Alan Chiu: That’s very true. That said, we’re seeing companies go international earlier in their life than perhaps previous generations of companies. While the absolute size of these markets are growing at the pace of GDPs, the ability for startups to reach these markets have increased over time. Growth has a direct correlation with valuation. That helps to create more highly-valued companies. That’s still rare. >>>
According to eMarketer, global retail e-commerce sales have grown 25% to $2.304 trillion in 2017 and is expected to grow to $4.9 trillion by the year 2021. Inspired by the growth in the e-commerce market, Germany-based NuCom Group is expanding its presence significantly. The company recently entered the Billion Dollar Unicorn club.
Sramana Mitra: What trends do you see? If you look back on the 2017 calendar year, what have you seen in your deal flow that you can synthesize as key trends?
Rami Elkhatib: I’ll answer this in two parts. As we are focused on enterprise software, we look at trends that have been persistent for five years and beyond. Since we began investing this fund, the combination of mobile, cloud, and data has completely reconfigured the enterprise IT market. That’s something that has persisted for a long time and will continue to persist for a long time. There is this side of the trends where there’s a lot of continuity in the enterprise market.
One day, something else will come along and reshape the landscape. We’re always trying to be on the lookout for that. Then within that, there are >>>
Sramana Mitra: At what stage did you encounter AddStructure and how did you encounter them?
Mark Hasebroock: We have an office in Chicago and I have a partner there. David is very plugged into what’s happening in Chicago. He heard about this at an event that he was at. He realized that it was something that could be a fit and just reached out.
Sramana Mitra: When you sold the company, what milestones had it gone through? How much money had you already put in? How much had the company raised in total?
Mark Hasebroock: I think they had raised $1.5 million in total. It wasn’t a huge amount. >>>
Sramana Mitra: You’re seeing more capital-efficient executions, which is good. In our philosophy, we strongly recommend that people bootstrap and be as capital-efficient as possible as long as possible before raising money. Even when they raise money, we prefer that they don’t raise huge amounts of capital, which is completely counter to the unicorn mania that has been running through Silicon Valley, which we’ll talk about in a moment.
I think the capital efficiency trend is a good thing from what you’re pointing out. Let me see if I understood what you’re trying to say here. You are saying that there have been a lot of seed investments in the last five years. The people who have invested are trying to get exits and not making a lot more seed investments.