Sramana Mitra: Comment on unicorn mania for me. We went a little bit crazy with this concept of unicorns. There’s just this very unfortunate twist that the industry has taken. How do you parse unicorn mania?
Nate Redmond: Unicorn status, if you will, became a marker of success that obviously is artificial in many ways.
Sramana Mitra: And flawed.
Nate Redmond: It’s flawed. It’s certainly evident of developing one measure of value which is reflective of an investor or a group of investors’ willingness to buy shares at a price. It doesn’t necessarily translate into long-term economic value. It can, but the correlation is lower than you would otherwise think and expect. The failure rate of unicorns is much higher than people realize.
One of the things that got embedded within a lot of unicorn mania was that in a company’s attempt to reach for this milestone, they were willing to trade off the type of investor, the way in which that investor engaged, and the structure of the deal. The list goes on. A lot of those dynamics are unhealthy. Clearly, it’s unhealthy for people to become so heavily focused on this sort of individual high-marker value whereas this long-term economic value is really what matters. That said, the nomenclature continues within the press. I don’t think it’s going away anytime soon.
Sramana Mitra: It’s not going away at all. You are looking for these outsized returns, right? You’re not looking for the niche opportunities?
Nate Redmond: It’s not just venture capital. It’s not just seed investing. It’s all growth investing including public markets. The power law is significant and applies across the returns. A few things make up nearly all the returns for a fund. Given that, you will always, as an investor, be interested in understanding what company really could be the outsized driver. Every venture firm will say, “We will only focus on companies that can emerge that way.”
That’s a byproduct of the notion of our fund. If you had a structure whereby you are really looking at investments on an individual basis, that may begin to change. The importance of the work that we are doing in rethinking markets is that of the power of a niche. We go back to what we talked about on Airbnb. Here, they were targeting a behaviorally niche segment that turned out to be a very large segment. What they needed to do was through different systems, establish trust so you could unlock this behavior. That’s how you’ll understand how that niche actually is representative of a much larger segment of the population that has not yet exhibited that type of behavior.
Sramana Mitra: I’m a huge fan of niches. There are two ways to look at niches. Right now, there are some 700 micro-VCs who are in a position to invest in niches and actually make 3x or 4x on niches because there is a lot of acquisition opportunity. Especially in SaaS, there is a ton of companies that could acquire to grow.
There are exit opportunities within those niches. The other way to play a niche is the way you’re playing it, which is to start with a niche and then be able to systematically broaden it to a more mainstream opportunity. Either way, niche is a very important piece of how to build a company.
Nate Redmond: To be clear, we also believe that you can go in and have a specific understanding and target and overserve that customer group and create delight that causes those customers to become your ambassadors as you go out. There’s a weight that most investors put against some understanding of TAM. When an entrepreneur comes in and says, “Here’s a trillion dollar market.” My first reaction is, “You don’t understand your market.”
In that notion of describing a TAM, you’ve missed the segmentation. Come in and have a very deep understanding of a very specific target. You overserve that target market. You’re now in position to go do what? These nested if-thens create the framework through which you really unlock the full potential of a company.
Sramana Mitra: Thank you for being with us today and sharing your insights.