Sramana Mitra: There is actually a pre-seed problem. There were 70,000 companies that received some sort of early-stage financing. In the last few years, these numbers have been very high but the number of companies that get venture financing remains at 1,200 or so.
In the middle where there are companies that have crossed over to being credible companies, that set of companies is actually much lower. A lot of companies are getting funding from, for a lack of better word, dumb investors who don’t know what they’re doing and just writing checks and creating a glut in the funnel. But it’s in the middle where you have good companies.
People don’t have access to the deal flow into those good companies. It’s a cumbersome early stage developing because of the entrance of a whole lot of very impractical and unrealistic set of expectations on behalf of people who have made money in the last few years. Smart money is rare. Smart deals are rare, but there is a glut in dumb money and dumb deals.
Venktesh Shukla: There’s one thing that has happened recently. The cost of starting a company has come down so much that there are thousands of experiments taking place, which is good for everyone. More of these ideas get explored. For the VCs, the risk has gone down significantly because by the time a company gets to them, a product/market would have already been established.
Sramana Mitra: There is a lot more bootstrapping these days which is a healthy trend. That’s how you take out the product/market fit risk. The more you take that risk out before going to investors, the higher your probability of getting funded anyway.
Venktesh Shukla: I haven’t seen the data but my hunch is that the number of companies getting Series A funding is not any lower than what it used to be.
Sramana Mitra: It’s been constant in the last decade in that 1,200 level.
Venktesh Shukla: Yes, but there is far more experimentation going on at the bottom of the pyramid, which is good for the ecosystem.
Sramana Mitra: Last question, what kinds of companies would you like to see? Give us some guidance on your fantasy deal? What segment? Where do you like to make further investments right now?
Venktesh Shukla: The areas that really excite me are the ones where you’re applying technology to solving some domain problem where you have a deep understanding of the industry and you’re using technology to solve that problem. That’s one category. The second category is, if it’s a general-purpose across a lot of verticals. What I’m looking for is some fundamental transformational technology. That comes down to the expertise and track record of the founders.
The third is, one consumer company I invested in. They make women’s bras with tricks in terms of the fit as well as the supply chain. That has been a surprising success in my portfolio. In the third year of their existence, they’ll do about $100 million in revenue. That’s a unique insight because the founders knew this problem that 30% of women cannot find a bra their size and they got to go to the store and try a number of different ones.
This is a company driven by that insight. Something like that is worth solving. It’s one particular industry’s problem driven by unique insights even if the technology is not transformational. Another category is where you have the next generation application performance management solution, or you have the next generation network analysis solution, or next generation database. Those are the kinds of things I’m looking for.
Sramana Mitra: When you do Cyber Security, you need to be really precise in terms of positioning of how you differentiate in this crowded universe.
Venktesh Shukla: It’s not just from a venture capital standpoint. What I’m discovering is in Cyber Security, every big company is dealing with at least 20 vendors. They absolutely don’t want to deal with the 21st vendor. Having something which is crisply identified becomes very important just to get traction in the market.
Sramana Mitra: How many ideas do you review in a month when you’re looking for companies to invest in?
Venktesh Shukla: I typically review anywhere from 15 to 20 ideas. In some cases, it’s a full-throttle review. In some cases, it’s just looking at the presentations and quickly making a decision that it is not a good fit.
Sramana Mitra: It was very good talking to you. Thank you for your time.