Sramana Mitra: What did they come to you with?
Miriam Rivera: This was three people. They had developed the prototypes of these devices. Part of that was that they had already spent several years in this non-profit version pursuing this goal of developing cheaper devices that could be used in contexts where technology wasn’t being used. They have shown tremendous commitment to what they were doing and in creating affordable and quick-to-produce devices. That was something that could reduce the cost of creating Internet of Things device by an order of magnitude, and also make it happen in months as opposed to a year.
Sramana Mitra: Are you chasing unicorns?
Miriam Rivera: Not generally. When we’re investing in the companies that we do, the chance of failure tends to be incredibly high. Probably our expectation is that about two-thirds of our companies may really amount to nothing. We’ve been luckier than that. In fund one, where we had made 64 investments, we only had 15% to 20% of those companies go out of business.
The reality is that most of those businesses will probably not be high-returning businesses financially. That’s true of the industry as a whole. In the United States venture capital industry, about 4,000 investments are made each year, but only about 2.5% of the dollars invested are returning most of the profit in the entire industry. Even for the top VC firms, about 4.5% of their investments generate about 60% of their profit. What I would say is that it’s a business that is hits-driven.
If you think about how many businesses work like the movie industry and drug industry, many of them are actually dependent on trying to find a blockbuster movie or drug. Venture capital is one of those industries. Everybody, in a sense, is chasing unicorns, but we try to do it before anybody else knows they’re unicorns.
Sramana Mitra: You will find this comment interesting with your Kauffman Foundation hat on. We are bringing on a lot of investors on to our community who have observed that most of the exits in the technology industry are $50 million to $60 million exits. That means that you can’t really raise tens of millions of dollars and expect any profits out of a $50 million exit.
They are going for small, capital-efficient ventures and then early exit so that they can stay within that window. A class of micro-VCs is developing who are focusing on that. It doesn’t have to be that swing-for-the-fences kind of thing. You can create niche value and as long as there’s enough TAM that gives a corporation a foot into an area they want to get into, you can still have a successful 5x to 10x return.
Miriam Rivera: There are a lot of different models of how people pursue early-stage venture. Frankly, there are a lot of companies that are building technologies that are going to be features as opposed to standalone and they’re well-positioned for acquisitions. That is one model that can be pursued profitably. For myself, I have chosen to do this for democratizing access to venture capital.
I’m playing this kind of a game because I’ve been really fortunate. My parents were migrant farm workers and factory workers. They came here from Puerto Rico. I was a full scholarship student myself. I’m a first-generation college graduate. I want to show Silicon Valley that people like me can achieve that kind of success in technology companies.
I believe that because I’ve had such good fortune to attend Stanford and to have been an entrepreneur myself, I have access that maybe others wouldn’t have. I’m going to use that access to demonstrate what we can do.
Sramana Mitra: Part of the mission of what we are doing is to provide that access to a vast number of people. Thank you for your time.