Sramana Mitra: How are the entrepreneurs receiving this alternate thinking?
Bryce Roberts: There’re two trains of thought. In the predominant Silicon Valley culture, the response tends to be, “Why would we do that?” They’re very indoctrinated into the idea of selling equity and getting on that successive round of funding to ratchet up the valuation.
We peg a lot of our ambition to the dollars we raise, the frequency we raise them, and who we raise them from. In our world, it’s like speed dating when I speak English and everybody else speaks Russian. It’s totally lost in translation. But then there’s a large and growing audience of people who really don’t want outside investors, but they could move much more quickly if they had access to capital.
One thing we heard early on as we were thinking through was, we ran into a lot of companies who had bootstrapped and said that they could have moved a lot faster if they would have just access to networks and resources. That group seems to be very excited about it. The other group has been the entrepreneurs who’ve gone the venture route. If you look at the numbers, seven times more entrepreneurs have raised a million or more over the last 10 years than at any other point.
You have this massive wave of founders who have been exposed to that venture model and the financial and psychological pressure of hyper growth. They’re not afraid to be an entrepreneur again. They have ideas they want to pursue. They’re every bit as ambitious but they recognize that there’s a time and a place for venture.
Oftentimes, it’s not in the earlier stages. They want to build a business differently this time around than that traditional venture path. A combination of those two has been super rewarding. It’s that response that encourages us to go much deeper on that initial pilot.
Sramana Mitra: Talk to me about how you view the entrepreneurs who are caught in the Series A gap. I’ll elaborate on what exactly I’m asking. There has been an excess of seed financing. It’s quite the opposite of where you pegged the opportunity 10 years ago. In the last few years, there have been too many companies that have been seed-funded with the expectation that they would raise venture capital.
I think it was 2013 when there were 70,000 seed-funded startups looking for venture capital. Venture capital is relatively constant. It’s like 1,200. 70,000 companies looking and 1,200 getting funded is a very lopsided equation. There are a lot of companies who are in that Series A gap.
Series A VCs want to see a run rate. If you’re working on a SaaS, they want to see a run rate of a million dollars – about $80,000 monthly run rate. Even if you manage to get a bit of seed financing to Series A ready, there is a gap. That has opened up for numerous entrepreneurs. Is this a zone where you’re playing?
Bryce Roberts: Maybe. It’s harder for us to invest if there’re existing investors on the cap table. We’ve set a threshold of not having raised more than $500,000. It feels like incentives aren’t too misaligned. We may be able to encourage those existing preferred shareholders to get on to our new term sheet and participate in any future profit. We have gone that route. We’ve looked at that.
The seed gap doesn’t feel like it’s $500,000. Typically they’ve raised a million – even $2 million. They have not been able to make the progress that their investors expects from them before they can qualify for Series A or B. That’s a big issue. A lot of entrepreneurs raise that million because it felt pretty easy to do. That next $5 million is much more challenging. They spend like it isn’t. They tend to build their business and business model around fundraising versus getting the fundamentals right.
Sramana Mitra: It’s a good indicator of companies that you should not invest in. They have a lot of discipline problem built into their structure and culture.
Bryce Roberts: With the fund we ran, we are also looking at those companies. Your point is exactly what we found. The discipline isn’t there. Oftentimes, you just scratch your head and say, “You just blew through $2 million. What do you have to show for it?”
Sramana Mitra: What is the guarantee that if I write you another half a million, you’re going to be able to execute and deliver meaningful metrics with it?
Bryce Roberts: That’s right.
Sramana Mitra: If you don’t have a business that has hit a really high velocity stride, going for traditional venture capital and getting into this twilight zone is something that I don’t personally recommend. This financing decision is a far more complex decision that is single-mindedly chasing venture capital.
Very enlightening conversation. Thank you for your time.