Sramana Mitra: When you are writing a $25,000 check for these companies, is that a convertible note or an equity investment? What terms do you apply?
Elizabeth Yin: If we are the first ones to the table, we will do that on a safe. If we are not the first ones on the table and there is already a round in place, we will look at the terms at hand. Sometimes this would be an equity round, equity note, or the safe.
Sramana Mitra: From your fund strategy point of view, are you looking for venture-style companies? Are you looking for $100 million revenue in five years type of companies or are you looking for early exits?
A lot of small funds are looking for early exits. In some cases, they are selling their position to later-round investors. What is your analysis of your fund strategy?
Elizabeth Yin: We are looking for a 100x return as the ideal for our winners. That is not something anybody can guarantee and something that does not happen frequently.
Let’s say that we are getting $3 million post-money. We are looking for an exit of at least $300 million. Depending on when you get in, the exit doesn’t need to be a unicorn. If that valuation is higher than our entry point, then the stakes are higher as well.
We are a relatively high-frequency investment shop in that we invest in 100 to 200 companies per fund. In 20% of the cases, we will follow on at around seed or so. We follow on based on several factors including working with the founders. Is it a good fit for both sides to continue working? That is how we decide on where to allocate most of our capital.
On that second check, we can also get in and believe that we can get 100x at that valuation. That is also a factor in our follow-on. We are looking for several reasons. Number one, the failure rate is so high. A lot of people say, “My companies are always doing well.” It’s not the failure rate of the companies but the failure rate for the investors.
I’ve been in several scenarios over the years where the company has done quite well, but there is no opportunity for investors to sell or get their money out. That is considered a failure. In that situation, the winners need to pay for all the failures plus a lot more.
The second scenario is, if you do have companies that have found product-market fit and are growing quickly, we like to grow that. It is a lot easier growing that than to start a new business and, as such, we don’t like to sell early.
Sramana Mitra: In the 25% of the companies, where you do a follow-on? How much money do you invest?
Elizabeth Yin: We will follow on with anywhere between $250,000 to $1 million.