Sramana Mitra: You’re seeing more capital-efficient executions, which is good. In our philosophy, we strongly recommend that people bootstrap and be as capital-efficient as possible as long as possible before raising money. Even when they raise money, we prefer that they don’t raise huge amounts of capital, which is completely counter to the unicorn mania that has been running through Silicon Valley, which we’ll talk about in a moment.
I think the capital efficiency trend is a good thing from what you’re pointing out. Let me see if I understood what you’re trying to say here. You are saying that there have been a lot of seed investments in the last five years. The people who have invested are trying to get exits and not making a lot more seed investments.
Alan Chiu: The bar has gone higher.
Sramana Mitra: For Series A.
Alan Chiu: And for institutional seed. Fewer seeds are being made but the companies that are able to raise a round are raising slightly bigger rounds.
Sramana Mitra: I think there are two points that I’m seeing. There are a lot more micro-VCs in the system. There are a lot of $15 million funds in the system right now than there used to be. These small amounts are in the system and are getting invested. Some of these are new funds. The bar is very high for getting any kind of Series A. The Series A gap is tremendous and growing.
Alan Chiu: Yes, that is very true. There is also a gap from pre-seed to seed.
Sramana Mitra: Yes, and that gap is going to grow as well for the same reason. The seed guys are looking for a higher bar and going from pre-seed to seed is going to be a bigger gap as we go along. How do you parse unicorn mania?
Alan Chiu: I think we went through a period where raising massive amounts of capital, in and of itself, was viewed as success. More often than not, it leads to undisciplined growth. I think we are backing away from that as an ecosystem. They are still happening, especially with SoftBank making later-stage investments. For the majority, we’re going back to a more normal, rational level of late-stage investment.
Sramana Mitra: As a fund that is in the $50 million to $100 million level, what, in your opinion, is the right strategy in terms of exits? Do you exit into some of these later rounds or do you stick around?
Alan Chiu: That is highly deal-specific but in most cases, we stick around unless a company ends up raising a round at a value in which we believe is just so high that it will be very difficult to grow into. That’s rare. In most cases, we keep our prorata. We want to keep investing in our winners.
Sramana Mitra: Your observation is that the kind of bloated valuation unicorns is not as common at the moment. The case for exiting into later rounds is not as urgent.
Alan Chiu: Right. We don’t feel the urgency to exit. We just continue riding the growth of the companies.
Sramana Mitra: Are you looking for these billion-dollar opportunities or are you also interested in the smaller opportunities that abound in the ecosystem right now? We are in 2018. Lots of stuff have already been built. Especially in B2B, there’s a lot of sizeable companies out there that are doing lots of stuff.
The gaps are more in the niches and not as much in the front and center opportunities that have already been catered to. How do you view the smaller niche opportunities versus the larger opportunities? Are you only looking to invest in the larger ones and disregard the smaller ones?
Alan Chiu: Everyone wants a billion-dollar outcome. No one will ever say we don’t want them. One of the advantages of managing a smaller fund in the $50 million to $100 million range is we could actually meet the numbers expected by our LP without necessarily having billion-dollar exits. We have a little bit more flexibility to generate the kinds of returns that we need. That’s a plus for us.
Because of the inherent uncertainty in starting a company, we’d still like to see the potential for a company to grow into a unicorn although they don’t have to be in order for us to succeed. Most early stage investors and entrepreneurs are very optimistic about the outcome. You have to have that level of optimism and hope in order to get something going. The reality would then eventually come in while discounting on that.