Sramana Mitra: Do they listen to your advice?
Jonathan Pines: In some cases, they do. In some cases when someone’s offering money at a high price, it can be very tempting to take it. The other piece that’s important is to be aware of the terms of the round. In some cases, the highest-priced offer may come with other complicated liquidation preferences and things that can have a real impact depending on the future of the company. At the very least, it is important to understand different scenarios that may happen in the future and what will happen to the capital of the company.
Sramana Mitra: One of my observations is that we’re in 2018. Lots of stuff have been built. Nowadays, there aren’t so many wide open opportunities out there to build these billion-dollar companies. There’s a lot of capital chasing these kinds of opportunities, but there are also many niche opportunities. Some of these businesses need to be built for small amounts of capital – $1 million to $2 million and then sold for $15 million. Maybe built for $5 million and then sold for under $50 million. On the other end of the spectrum, maybe invest $250,000 and sell for $5 million. What is your take on these kinds of opportunities?
Jonathan Pines: First of all, I find it to be a very fascinating question. In the past life, I was once a founder of a startup that ended up becoming more of a small profitable business and not so much an extreme growth VC-backed company. I personally have a lot of respect for people who build small businesses that work versus the thesis you get for many venture-backed companies which is, “Go big, or go home.” There is a great middle ground of building a good business that can employ and make a profit.
As a fund, we do view this a little bit differently where our focus, as a group, is on helping people scale organizations. For some of these types of smaller businesses, we don’t feel that we necessarily bring the same amount of power that we can where there is rapid organizational growth, rapid customer growth, and things where we can really put our network to work. As a fund, we tend to focus more on the high-growth types of businesses.
Sramana Mitra: So you’re not looking for the early-exit types?
Jonathan Pines: We do, but we’d like to see potential that there could be rapid growth and a big company in the future. We do, in fact, get involved early and we have started working with founders.
Sramana Mitra: I was talking about early exits. There is a class of investors out there which is still small. These are people who want to do things in a capital-efficient manner. These are smaller exits, but you can make very good 3x to 4x returns with this money as well. There are so many more acquirers right now, especially in SaaS.
Jonathan Pines: Yes, and we’ve certainly have had companies that have very nice medium-level exits. Most of those cases, they did not go in from the beginning with that plan. In the end, it can be something that makes both the founder and investors very happy.
Sramana Mitra: Thank you both for explaining your point of view.