Sramana Mitra: Of your ventures that have raised venture money, have they raised venture money from these $75 million to $100 million funds, or have they raised money from the bigger funds?
Venktesh Shukla: They typically raise money from bigger funds because these are big spaces. One of them was how do you handle structured and unstructured data. Every company in the world has that problem and there is no solution. With the onset of predominantly mobile access, the old networking problems haven’t gone away. The new ones have piled on top of that.
Using machine learning, how do you isolate the problem when somebody complains that he’s seeing poor responsiveness? That’s a new category of problem. The third one is how do you create a virtual private cloud in minutes. The traditional route of devops, testing, and deployment are three to four-month long processes. How do you cut that short and do it in minutes? It’s something like using AI to prevent data theft.
Sramana Mitra: These are the kinds of problems that, for the lack of better word, the unicorns are supposed to solve.
Venktesh Shukla: Absolutely. You hit the nail of the head. My learning has been, in theory, if you’re a small investor, the strategy is to find a defensible niche and entrepreneurs who can explore the niche and get an exit. In practice, what I found was that those combinations are very hard to find except in industries like semiconductor intellectual property.
In any of the space, whatever the niche they choose to start out with could easily become a feature of something bigger or if it’s not executed quickly, then there are plenty of others who’ll show up. If you can get a quick exit, then all those problems multiply.
Sramana Mitra: I completely agree with you. You can play that game only with relationships with the acquirers.
Venktesh Shukla: You can’t play that game because if it’s taking longer and then you have to raise money, then you’re back to the same equation again.
Sramana Mitra: Small niches don’t have TAMs to raise venture capital. Getting back to the unicorn opportunities, those are also few and far between. It’s not like unicorn opportunities grow on trees. That has a different set of issues happening right now. Because there’s so much money in the hands of the larger funds and there’s so much private equity and late-stage fund, there is unicorn mania right now.
If there is a company that has the characteristic of being able to become a unicorn, those companies become smothered with funding. As a seed investor or angel group, you could get buried under later-stage liquidation preferences.
Venktesh Shukla: If the opportunity is attractive, the company has a lot of negotiating leverage. I’ll give you one example. There’s this Big Data company with no customers, no product, no revenue, in which VCs put $20 million at a valuation of $100 million. This is potentially because they think it’s a unicorn company. They’re not stringent at all because they want to get into the company. They cannot afford to dictate with their terms.
Sramana Mitra: There are a bunch of problems coming about later on. This is to get into the company. There’s a bunch of middle eastern money wanting to get into attractive deals like this. They’re giving the founders a lot of liquidity as one of the ways to get into the deal. That’s creating another set of issues.
Venktesh Shukla: That is very unhealthy. I saw that happen in India two to three years ago. All these entrepreneurs who haven’t returned a single penny to the investors, they’re buying $5 million homes and becoming angel investors. The companies haven’t done diddly-squat so far.
Sramana Mitra: This is a part of the problem of having too much money in the system.
Venktesh Shukla: I entirely agree with you. This is really a later-stage problem. At the seed stage, there is not really a problem. This overabundance of capital is for startups that are reasonably successful and raising Series B and C. For the seed, I don’t see that problem.