Sramana Mitra: I understand when you are working with Hive companies feeding into your venture fund. When you’re working with the more general market of people approaching you, what are you looking for in terms of validation when you want to invest in a company?
We’ve heard all kinds of metrics and all kinds of conditions from various VCs who are looking at maybe $1 million ARR. What is your comfort zone?
Sumant Mandal: I’m not sure we have any strict number or comfort zone. I think what we’re looking for is some validation, whether that validation comes from the quality of the team and their past experiences or from customers and number-driven validation, or from footprints-driven evaluation.
We’ve seen companies that have hundreds of people and customers using them but still haven’t quite turned on the revenue engine behind it. There are many ways for a company to be compelling. There’s no one specific formula.
The nomenclature of what used to be series A looks more like seed now. What used to be series B looks more like series A now. I see more and more companies with more proof points behind them come to us even for series A.
The series A amount has also changed. Series A could look like $12 million to $20 million into a company which used to be $10 million years ago as Series B.
Sramana Mitra: There’s a lot of bootstrapping going on and that I think is a very healthy trend because you can get to more validation. The more validation you get, you’re raising venture capital with more security and more understanding that you have a venture-scale company.
Very often, if you raise a lot of money in the early stages without understanding that, you may very well basically put yourself out of business by raising venture capital. Because then, you’re not fulfilling the metrics and the expectations of your investors and they’re not going to continue to fund you.
Sumant Mandal: There are many things that go into that. We did some analysis a few weeks ago for our own investor base. The average age of a company that’s going public right now is about 11 years old. 10 years ago, that used to be 5 to 6 years old.
The average IPO is also three to five times larger than it used to be 10 years ago. As a fund that has a limited lifetime, you want to be closer to seeing an exit in the 6 to 7-year timeframe than 10 to 11 years. All of that has shifted.
It has also created 500 angel type funds that were under $50 million. That number has come down a little bit. It’s probably half of what it used to be, but it’s still a very active part of the ecosystem.
Sramana Mitra: When you encounter situations where a company has already been around for a bit and has taken the time to find their product-market fit- but they have found product-market fit, and there has been some amount of micro VC money that has gone into the company. Do you sometimes buy these funds out?
Sumant Mandal: Yes. Sometimes you clean out the cap table as best you can for the future. Again, it’s all situation dependent. I can give you examples of companies where they raised no venture money but have continued to raise money from strategics which is another known source of capital which probably, 10 years ago, was one-tenth of what it is now.
Big corporates now have very active investing programs. Any corporate would say that they have some kind of a corporate venture program. There are certain things that a venture fund looks for in a company – structurally, team wise, cap table wise, process wise – which are not necessarily best done in a bootstrapped fashion or when you take money from non-venture resources.
There is a little bit of a clean-up and catch up that needs to be done for a company to fit a venture profile in that case.