1Mby1M AI Investor Forum: Mark Phillips, Founder and Managing Partner at 11 Tribes Ventures (Part 3)

Sramana Mitra: Yes. Most VCs and certainly Andreessen Horowitz are operating with a unicorn chasing mindset. This particular fundraise by Andreesen Horowitz is absurd because to give returns to limited partners on a $20 billion fund makes no sense.

Mark Phillips: It makes no sense.

Sramana Mitra: It does not make any sense because there aren’t enough exits to give that level of return in one fund, because that’s assuming that the entire industry’s returns are going to pay go to one firm.

Mark Phillips: I think I saw a stat that if you do the math, they need to generate something to the tune of $600 billion.

Sramana Mitra: $640 billion.

Mark Phillips: Okay. That is more than the last 100 IPOs in the tech industry. To the founders listening, you really have to get what the VC that’s giving you money wants from you. What Andreessen is really drawing the line in the sand is like unicorn isn’t enough for them anymore. Now, they’ve got the word decacorn and they’ve got centacorn with a $100 billion dollar outcome.  

Sramana Mitra: These unicorn chasing speculative investments end up in unicorpses very often.

Mark Phillips: Right. Indeed.

Sramana Mitra: You are raising $20 million at a $50 million valuation. Well, it’s not going to be a $50 million valuation. That’s too much dilution in Series A. If you’re doing a $20 million Series A that’s too much dilution. So that doesn’t really work. You’re raising $20 million on let’s say $80 million valuation with no real goods, right? You don’t have the MRR or the ARR to support any of this, it’s all speculative. Then you have to backfill that valuation before the next round of financing. Otherwise, you’re going to have a down round. This is a terrible situation.

So, anybody who’s listening and who’s thinking about unicorn chasing, blah, blah, blah, blah, please. The fact is that this is not to your advantage.

Mark Phillips: No, it’s not. That’s such wise commentary, Sramana. So, you’ve asked me a direct question, and now I need to give you a direct answer.

What are we doing? We’re running as quickly as we can to the other end of the barbell. I think the venture capital ecosystem is going to become a barbell approach.

The reason Andreessen exists is because there’re these pension funds and endowments that have massive amounts of capital that they need to put to work, and they want to park it somewhere. They want to have a name brand associated with where they put that money. So, these firms are not going to stop raising these massive funds. I think the thing that’s going to emerge over the course of the next 10 years is the proliferation of truly value additive emerging funds that are much smaller.

We just closed our second fund. It was a $46 million vehicle. We had targeted $40 million. We oversubscribed by $6 million. We’re thrilled to have this new capital in market, and we’re actively deploying that money. As we look at the kind of businesses we want to find, we are focused on entrepreneurs that are generally located outside of the coasts. We want founders that are based in tier two cities. We are domestic investors focused on North America at this point. We do hope to expand into the future when we look at these entrepreneurs. We want folks that are basing a tier two or tier three geography. So that’s Chicago, Atlanta, Austin, Texas, Denver, or Colorado – ecosystems where there’s less hype.

What we’ve really experienced, Sramana, is what I would call geographic price arbitrage. Simply because a company’s building in Nashville, Tennessee, as opposed to Silicon Valley, as investors, I think we’re getting something probably close to two to two and a half times discount at the seed stage. So that’s the first component.

The second is what I would describe as capital efficiency. We are really subscribing to this idea of seed strapping, which many founders have probably read about over the course of the last six months. It’s the idea of taking a moderately sized seed round at a reasonable valuation, using that seed capital to drive to cashflow break even and ultimately making a strategic decision about whether they raise future capital moving forward, or using the profitability of the company to grow their organization.

Those are the kinds of companies that we really want to participate in. Sector wise, we are very agnostic. We will look at anything, if it kind of fits those two criteria.

Then, the last piece I would describe is that at our core, what we really are is leadership investors. Everything I shared at the top of our conversation; those are the passions that our team holds. The idea that the leader is the only thing within the organization that needs to grow faster than the company is something that we really share with our teams and with our portfolios on a regular basis.

So, if you give me an entrepreneur who has a unique right to win in the space – maybe they’ve worked in the supply chain industry for years, they’ve seen a problem, they now know how to solve it, and they’re stepping out and want to run a very capital efficient business – that is the type of entrepreneur and that’s the type of startup that we at 11 Tribes get really excited about backing.

This segment is part 3 in the series : 1Mby1M AI Investor Forum: Mark Phillips, Founder and Managing Partner at 11 Tribes Ventures
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