Sramana Mitra: Your point is very well-taken. In the early stage, not everything is figured out. There is a certain amount of pivoting that goes on often in the quest for that repeatable sweet spot. Capital markets change and competitive markets change. You just have to adapt.
With that understanding though, I want to ask you a slightly different question. We are in the beginning of 2019. Lots of stuff have already been built. It’s not like there are so many wide open opportunities out there to build these massive unicorns. There are some and there are categories where people are pursuing that kind of opportunities. 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 $10 million to $15 million. Do you have appetite for this type of investments?
George Spencer: Probably not. I’m very comfortable with something that can sell for $150 million.
Sramana Mitra: What do you peg the capitalization for those kinds of investments? What is the ideal amount of capital?
George Spencer: I think that’s a good question. In my 10 years, there are three key elements of the capital markets that have changed the dynamics that we’re operating in today. Obviously, it’s a little bit of a world of shifting sands. The first is, it’s way cheaper to get a product to market today than it used to be.
What took $5 million to $10 million 10 or 15 years ago takes a million to a million and a half dollars now. That’s the first thing. The second thing that has happened is that commercial banks have entered the market pretty aggressively and are willing to lend to companies once they get to $400,000 of MRR. The third thing is the private equity market has gotten incredibly frothy in my opinion.
Once you get to about a million dollars a month in MRR, there are lots of guys who are willing to invest in your company, buy your company, and go create your own deal depending on what people want to do and how well the company is doing. You can look at any multiple. Depending on what vertical or horizontal you’re in, your business is probably worth somewhere between $36 million and $70 million. Maybe more depending on what you’re doing.
To get a company to a million dollars in revenue, it probably doesn’t take a lot more than $7 million of equity. That’s startup through the Series A. Maybe a little bit of Series B.
Sramana Mitra: I think you provided an excellent answer to that. My take is, if you can build a company to a reasonable scale and let’s assume your metric of a million dollars MRR is a reasonable scale point for $5 million to $10 million in investments, you’re in a good place with lots of options.
George Spencer: That’s exactly right.