By guest authors Irina Patterson and Candice Arnold
Irina: How much of a company’s equity do you usually seek?
Randy: It’s usually about 25% of the company is being given out in the form of equity for our capital.
Irina: What’s the typical return you seek and over what period of time?
Randy: Well, you know, obviously, companies come to us and say they’re exiting in two to three years, and we multiply everything times two because we’re empathetic and market conditions . . . And so we expect an exit, hopefully, between four and six years. In our returns, we like to see a sixfold to tenfold return. If you look at the Geoff Roach study between 2000 and 2007, which has now been published, we were fortunate to have over 20% IRR in an entire portfolio. Obviously, we’ve had losses, but if you invested $1 in a whole portfolio, and it had some form of [good] event and/or an up round and/or a down round, we’ve had over 22% IRR for that whole portfolio.
So, to answer your question, we’d like to see a return commensurate with our risk, and so, I, and our members investing, we like to see over 5x and if in fact it’s a brick-and-mortar company, that is, real estate or clean tech, and we look at IRR components, we like to see a 20.
But in this environment, some of our companies are yielding 10% to 11% or 12% cash-on-cash returns and distributing that, and that’s fine with me. We have a leasing company that I’m an investor in right now that’s returning about a 16% return. In this environment, that’s very acceptable.
If you look at a lot of the public market indexes, they’ve been losing money for many years. Obviously, it’s been much better the last 12 months in some sectors, but, to answer your question, obviously, we’d like to have a return commensurate with our risk.
Irina: At what stage of a company’s development do you usually like to invest?
Randy: Well, we like to see revenue, and that’s our validation. Not all members like companies that are more mature, some like early stage. But typically, the ones that get voted in have some type of revenue and some sign of sustainable revenue. It’s called recurring revenue that we can point to during our due diligence, and if they have customers who’ve continued paying over the last couple of years, that’s very powerful due diligence metrics. And so, most companies come to Keiretsu Forum usually have some type of revenue that we can point to, that we can do due diligence on and that’s our validator.
Irina: What about total available market (TAM)?
Randy: It has to be large enough. They’ve got to be $1 billion markets, because the only way this company’s going to make money and we’re going to make money is if they scale.
And they’re not going to scale aggressively in smaller markets. Each industry is different, so it’s very hard to give you a specific answer to that. But technology companies that come to us, generally, they’re in the $1 billion marketplaces.
Irina: So, you wouldn’t look at anything below $500 million, or a smaller niche market?
Randy: No. That’s what’s so special about Keiretsu. We look at every market, and there might be a sector . . . We’ve invested in a skateboard company that invested in a maverick surf contest here in Northern California and have licensing rights worldwide for their apparel. We like to throw the dice at many opportunities, so it’s really hard to answer your question about sectors or about market caps. If a market cap of $500,000, we’ll invest in something like that, but market caps are obviously larger in software, in the SaaS model approaches, and so forth.