Sramana Mitra: How big is the fund?
Clint Chao: Our first fund is a small fund. It’s a $10 million fund. We launched that officially in 2015. We did a first close on our second fund late last year. That’s a $50 million fund. Our initial investment in fund one averaged around $250,000. We reserve about half the fund for follow-ons. In the new fund, we’ll increase that up to upwards of a million dollars with a similar reserve strategy.
Sramana Mitra: Do you position as a seed fund, pre-seed, post-seed? Where in the spectrum are you positioning the fund?
Clint Chao: We like to call our fund early stage. We deliberately like having that broad definition. These new definitions are great to help entrepreneurs understand stages but at the end of the day, what we’re looking to get involved with are companies that are building something groundbreaking. They need to be able to raise enough capital to prove out the technology and prove that the market is going to embrace that.
Those two break points are natural places where I think follow-on fundraising opportunities exist. What we like to do is get in on that first breakpoint where a company has some initial conviction on their strategy and in the process of validating that with the customer base that they’re targeting.
Sramana Mitra: You’re not necessitating that the company has product-market fit or paying customers.
Clint Chao: No, we’re not necessitating that. In many cases, entrepreneurs are able to put something together to demonstrate to customers the potential or the capabilities of their offering. They have the opportunity to iterate and morph their business to achieve a true market fit. At some point, they need to build an efficient selling engine so they can create repeatable sales opportunities in the marketplace. That’s what we’re trying to look for. Can they build a repeatable process to sell their platform to customers in their industry? Our fund is so young and early. Based on what we’re seeing, we’re seeing good signs of disruption-capable companies. We’re excited about that.
Sramana Mitra: Great. I would even say that what you described would, in today’s segmentation parlance, qualify as pre-seed. That’s great because that is that part of the ecosystem where there is really a shortage. If everybody looks for companies that have already crossed the million dollar run rate, it becomes very difficult for entrepreneurs because it’s not so easy. Yes, entrepreneurs can do a lot with so little.
We are big supporters and believers in bootstrapping. We’re constantly coaching our entrepreneurs to bootstrap as much as possible. It takes time to bootstrap. Having funds that are willing to work in that pre-seed stage without necessitating all these things already taken care of is helpful. In the next phase of the industry’s evolution, if we can get a bit of momentum going in that pre-product market fit, that would help entrepreneurs.
Clint Chao: That’s a good point. The fact that we have so many different categories illustrates the fact that at the end of the day, the entrepreneurs are faced with a daunting challenge. They have to start up and they have to be able to convince investors to believe in the scalability of the business. From day one all the way to the point where they are able to attract that kind of attention and money takes a while.
I actually think entrepreneurs at this stage are looking for investors that have an understanding of that path and can help them figure out a way to do that. Far too often, we see entrepreneurs raising too much money too quckly or not enough money. They can make a lot of mistakes because they run out of money.
Sramana Mitra: It’s very tricky to balance across all these different dimensions.
Clint Chao: It’s also tricky when entrepreneurs raise lots of early money from lots of different investors.
Sramana Mitra: It’s a very bad idea.
Clint Chao: We like getting involved with these companies at their early stages and then become an influential investor with them and be able to help them get through that. It would be nice if they could build a seed round with fewer investors rather than more.