Sramana Mitra: What happens to the rest of the companies that don’t get the follow-on?
Elizabeth Yin: They continue just like everybody else. We help our companies regardless of how much we are investing. The natural question in people’s mind is, “If you don’t follow on, does that mean it’s a bad company?” The answer no.
If we look at companies that we didn’t follow on, in some cases, they may be phenomenal companies, but the valuation might have gotten away from us where we didn’t believe that we would get 100x. That is a reason why we would not invest again because we felt the valuation was too high relative to where they were.
It could be because we were preempted by another fund. In other cases, we may want to follow in the future. There isn’t any distinct point of time where you would follow on. One big change in the ecosystem is a lot of people are investing in convertible notes.
When we do follow on, it’s usually off round. We may not do the seed but we may do the post-seed and offer it as a direct check. We may do it before the seed as well.
The last consideration is the learnings about the market and the growth. The company could be growing quite well and will be a successful exit from a founder’s perspective, but it may not hit the requirements it needs for us to return the fund.
Sramana Mitra: Are your follow-ons safe or are those equity investments?
Elizabeth Yin: They are typically safe.
Sramana Mitra: You talked about digital health being one category and B2B in another. Is there a breakout company in your fund that has done well that you can talk about in a bit more detail?
Elizabeth Yin: We have only been around for three years. Nobody would have heard of the companies that we invested in the last two years. We’ve rolled in our angel investments into the fund. We invested in seed or pre-seed in Webflow in 2012. We are seed investors in NerdWallet. Both of those are doing incredibly well even if their valuation is unannounced. They are in that unicorn status. The Pill Club is one of them as well. Those are the most well-known in our portfolio.
Sramana Mitra: Based on your observation about the market trends, COVID, and extreme amounts of online time spent – what have you concluded as what you would like to invest in? What is your current investment thesis based on trends?
Elizabeth Yin: It’s funny because this entire year has been so challenging to predict. For us, we just stay the course based on the current framework of what we think. We will have relatively straightforward customer acquisition, but even that is hard to predict.
A lot of my companies that have been using Facebook ads have seen a benefit from COVID because the customer acquisition cost has gone down tremendously. A lot of companies have stopped advertising all together because of COVID and the potential uncertainty. That would be challenging to predict.
I don’t know which way it would have gone, especially in line with the fact that digital health and remote work have boomed during this time. Digital health particularly uses those channels.
I have two health companies that have been able to expand their market because regulations have also decreased during that time. You can now serve other states easily without having to jump through the normal hoops. I don’t know whether they would last or not. It has been interesting to watch.
Sramana Mitra: Thank you for your time.