Sramana Mitra: Are you shooting for unicorns?
Navid Alipour: While we certainly wouldn’t shy away from getting home runs with unicorns, our business model is to stay with that baseball analogy. We want to be able to make money for ourselves and other co-founders by hitting singles and doubles. Your traditional venture fund invests in 20 deals knowing that 10 of them will likely fail and they’ll have a couple of 1x, 2x, or maybe 3x return. They’re betting on one or two home runs to make the fund.
Everything they look at has to have 10x unicorn potential, right? They might not invest in a deal where the total addressable market might not be large enough. For us, that’s very different because we can look at something and say, “We can build this and own a founding piece of this and get an exit for $20 to $30 million.” That’s incredibly low in the venture fund space. If we can do that and sell it, not only will it do well for us and our investors but also for the founders because there’ve been many situations where the company, after two to three years, has a certain amount of traction and they get an offer.
The board of VC’s will vote it down because they’re like, “No. We’re not going to sell for $50, $80, or $200 million. We need to go for a unicorn.” Sometimes it happens, but, often, things go wrong. There’s other competition.
Sramana Mitra: Based on your investment thesis, I do think that verticals have different domain specific workflows and opportunities to apply AI but these are not always billion-dollar TAM opportunities. Many of these are niche opportunities. Not all are TAM opportunities. Even if you force it, it’s not going to become a billion-dollar company.
You have to design it from the beginning for a smaller exit, but you can build fantastic businesses focusing on these niche domains. Applying cutting-edge technology to niche domains is a very powerful opportunity. I’m very much aware of that opportunity. We see stuff like that all the time. I think it’s an astute analysis on your part to focus on some of these.
Navid Alipour: You summed it up accurately. I think we’re in agreement there. My partner, Blaise, who is from France says that CEO’s from the US brag about how much money they raise instead of bragging about how much money they make. It’s very different, right?
Sramana Mitra: But you can end up raising $100 million and end up with a $5 to $7 million total exit. Whereas if you control your capital raise and manage the exit process well, you could be making $25 to $50 million on smaller exits.
Navid Alipour: Absolutely! I remember reading an article. I don’t remember the name of the company, but it sold for $300 million. The founder and CEO only netted a million dollars. On the other end, everyone’s patting him on the back, “Great job. You made it. You can retire.” In another case, I know a husband and wife team that started a company out of college that didn’t raise a penny. They didn’t even give options to their employees. They sold their company for $40 million cash.
Sramana Mitra: We have case study after case study of these kinds of stories. We have over a thousand case studies including 400 plus bootstrapped case studies. We know this inside out. I’ve just started writing another series on LinkedIn. It’s addressing why it’s so important.
I don’t know if you saw the piece that I wrote recently called Bootstrapping to Exit. All of these topics need to be out there in a much subtler and nuanced way; not the way New York Times wrote. They wrote this, “Entrepreneurs are asking VC’s to get lost.” That’s a stupid point of view too. We’re in agreement.