Sramana Mitra: You can play this with a very specific domain focus with a specific set of corporate around you. In some cases, these corporates are investing in these little micro-funds that play this game. It is a little side of the industry that is developing. There are these little niches which are not venture-scale niches. They’re not going to be venture-fundable. You can only play these if you work with little bits of seed money and then, pretty much, go straight to acquisition and not go out to raise a venture round.
Venktesh Shukla: Absolutely. It is to critical to understand not only the niche and the technical chops but also the relationship in that target ecosystem. Do you have a member in your team that has that visibility and relationship with the key players in the industry?
Sramana Mitra: How do you process the current investment climate where capital is moving further and further upstream? How does an angel group or an entrepreneur, for that matter, mitigate the Series A gap? Funds are getting bigger. Venture funds becoming larger means that they can only do larger Series As.
There is a group of investors that are playing into that gap, but the more traditional firms are going to $5 million to $7 million Series As. They already want a $1 million ARR in a cloud investment before they’re going to put in any money. Getting to $1 million ARR, as a seed stage investor, takes time. It takes quite a bit of navigation.
Sometimes that is a gap where people are falling into. They get a very initial investment and they’re not quite ready for Series A, so they need more money in that gap stage. How are you dealing with that in your fund or in your TiE angel investment?
Venktesh Shukla: That’s a very good question. I have one situation in the crowded Cyber Security space. There have been failures in that space – failures in the sense that people have raised huge amounts of money but haven’t really delivered corresponding returns. VCs have become worried. That’s one situation I’m aware of where this Series A gap is a problem.
If you are really solving a potentially big problem and you’re solving it in a way that inspires confidence, then I do not see that problem. I see that problem only where it’s a struggle to differentiate the company and what it does in a very fundamental way. If you’re doing something that is highly differentiated and potentially a big market, I do not see any problems in getting Series A funding.
Whether it’s $3 million or $10 million, there are plenty of choices available. Because the NEAs and Sequoias of the world want to invest $5 million to $10 million, there are plenty of these $100 million funds that have come up in the last two to three years to pick up that slack. They are pretty active.
Sramana Mitra: The best thing that has happened for the Series A gap in the last three to four years are the $75 million to $100 million funds that are willing to do the $2 million to $3 million Series A. That was clearly a requirement in that category.
Venktesh Shukla: You’re absolutely right. To give you a perspective on my fund, I have about 12 major investments. About seven of them raised venture funding. None of them had any difficulty. Three of them aren’t raising any VC money because they’re doing well. Only one of them is having a problem. It’s having a problem because they happen to be in a the very crowded cyber security space where a crisp differentiation from the pack is a challenge.