Sramana Mitra: You had both transaction revenue and marketplace revenue.
Garrett Goldberg: The company exited right as we were turning on marketplace transactions. The next one had that as well. It’s a marketplace in the chemicals industry called Knowde. Instead of having a software product, it had a storefront tool for chemical producers to sell their wares.
The chemical industry is very stagnant and old school. There’s not a lot of e-commerce. That software product, rather than being a workflow tool, was an e-commerce storefront that enables transactions. It just recently started turning on the marketplace. You can monetize the tool and the network or the marketplace downstream. You either come for the network and stay for the tool, or come for the tool and stay for the network.
If a founder just tried to open up a marketplace, no one is going to come. No one’s going to pay a service fee for relationships they already have.
Sramana Mitra: I have a question that comes to my mind based on your exiting of the construction marketplace. This is something I’m seeing in small funds investment strategies.
Not everybody is playing for unicorns. Small early-stage funds are often following the strategy of very capital-efficient business-building and then exiting out early. It sounds like that is something you are doing.
Garrett Goldberg: We have a metric we track internally here called enterprise value to return to fund (EVRF). It’s the fund, $40 million, divided by our 10% percentage ownership, which equals $400 million. We target an EVRF of sub-$400 million, which means we have to own more than 10% upon exit.
Very few companies make it to the billion-dollar mark. We hear about every single one, but there’s a 99.9% that don’t. There are a couple of business models in seed and pre-seed. Ours is having a concentrated portfolio. If and when, we do have that billion-dollar outcome, it’s going to return the fund three or four times.
What we can’t do is have our one amazing goal that goes to a billion but only returns half the fund. That’s not a winning business model. We really focus on EVRF, which means going early with conviction into these founders and not writing $50,000 but writing $500,000 checks. We price our investments to be able to return the fund with modest exits.
Sramana Mitra: What happened in the exit of the construction marketplace? Who acquired the company? Could you talk a bit more about that scenario?
Garrett Goldberg: It either needed to go all the way and become a standalone billion-dollar business, go public, or it had an opportunity to exit. It had term sheets to raise $50 million or it had the opportunity for Procor and Autodesk to buy it. The founders could look at, “If I take $50 million and go all the way, here’s my ownership. Here’s the number I have to get to”
Then there’s the exit, which was at a really attractive multiple at that time. Maybe 30x revenue. The founders looked at it and said, “There’s a risk element of us trying to go all the way. Certainly, there’s an upside there.” They took the earlier exit. We never got to that network transaction. Autodesk felt that it fit perfectly in their suite of tools.