1Mby1M Virtual Accelerator AI Investor Forum: Warren Packard, AI Fund (Part 6)

Warren Packard: Since you’re pointing out that by Series C and Series D, there’s a declining ownership. Of course, there is always a declining ownership in the company, but maybe, perhaps too little remaining for a founder.

One of the great things I see about AI is the ability for a founding team to build and get to get further faster with less.

Sramana Mitra: Yes.

Warren Packard: You just don’t need as much money. Of course, a lot of folks are talking about who’s going to be the first billion dollar valuation single person company. I don’t actually recommend that.

I would say that my goal would be the two person company because it’s always great to have a teammate. I would never say you should work alone.

Sramana Mitra: It doesn’t matter whether you’re single or double. I’m a solo entrepreneur. I’ve always done solo entrepreneur ventures, but that doesn’t mean that you don’t have a team. My team has been working with me for more than 15 years. So, that doesn’t mean anything.

Warren Packard: Absolutely.

Sramana Mitra: But I think there is a fallacy in thinking in that mode of confusing the market. You’re going to build a solo unicorn, you’re going to build a three-person unicorn.

I think there is fallacy in that. But let’s stay on the topic of your model first and then we’ll get to that.

Warren Packard: Yes, exactly. The point I was driving to, whether it’s one person, three people, 10 people, is that you can make a significant amount of progress with AI by your side.

I mean, being able to code very rapidly by just using prompts to generate your code. We are a product-led organization here. So, we have a 10-week build process, because once that founder-in-residence is on board, they remain paired with a business builder and two technology builders. We also bring in a board member as well. And then a 10-week period, that team of five is building a company.

Every single week, we prototype the product, we put it in front of prospective customers, and we iterate every single week from the very beginning. We’re constantly getting customer feedback, external feedback, and we do that eight times in our process. It’s very inexpensive. It’s very rich in terms of the information that you glean.

By the time the build is over, we very strongly understand the ideal customer profile, the minimum viable product requirements, we can get to an MVP and get to launching that product very quickly after funding.

It just doesn’t take a lot of capital. The key for retaining ownership is to be that lean corporation. You can do that more than ever.

Sramana Mitra: Are you putting in some amount of capital in this phase?

Warren Packard: Absolutely. So, in that 10-week build phase, we put in a fairly nominal amount of money because we’re putting in a lot of human resources. We also put in some capital to give the founder residents a stipend and pay for some external resources or data or whatever needs to be done. The larger check gets written after the build, assuming the build is successful.

Not all of our builds are successful. That’s where we typically put in a million dollars into the company. Or if we have a co-founder, or another co-founder, a corporate co-founder, because we co build with our corporate LPs, they may also be putting in money at that time.

Typically, our pre-seed round is anywhere from one to $2 million to get the company into launching, get initial customers on board, paying customers, referenceable customers, and then go out for the seed round of financing where we’re looking to raise three to $5 million for the company to get it to product-market fit.

Sramana Mitra: Okay. You said you’ve invested in 46 portfolio companies so far. What are the trends? What are you seeing? Like how many companies have already exited? Sometimes companies that have early validation can hit success early also like to get out early.

Warren Packard: That’s right. We’re still a very young fund. As I mentioned, we just announced fund two. Our fund one companies have been going for some time, but the classic dilemma of raising a second fund for a venture firm is that you really don’t have many exits by the time you’re raising fund two. Frankly, your success stories take on the order of six to ten years to materialize.

Sramana Mitra: Absolutely. A young fund will not have exits. Not that many. I was asking about that because there is a bit of a trend right now of seed strapping to exit. We are seeing a bit more of that. I don’t know if you have started seeing as well within your portfolio, but it sounds like not yet.

Warren Packard: We have a couple of companies who have exited. We have one company that was sold to Apple just a few months back. We had another company that was sold to IBM a few months before that.

We have a few companies that are out of business because everything didn’t work out. That’s why we have a portfolio.

We are investing in, as I was mentioning earlier, venture scale companies and we’re looking for these large, outsized returns like any venture capital fund would.

Sramana Mitra: That was my next question. So, you are unicorn chasing fundamentally.

Warren Packard: Yes. All that being said, with a smaller fund, one could argue – is $190 million a small fund or a big fund. Whatever it is, we’re always looking for unicorns. We want to be creating the game changers for sure, but we can have quite a few doubles and triples in our portfolio. That too is great for us because it is only a $190 million fund. If we have a reasonable ownership stake in a company that sells for $500 million, that’s going to be an extraordinarily pleasant exit for us.

But certainly we’re looking for those companies that can exceed a billion dollars in value and be the seminal companies of this AI era.

Sramana Mitra: Very interesting. This is a very interesting slice of the venture capital ecosystem. So, thank you for sharing this with us, and we’ll keep in touch.

This segment is part 6 in the series : 1Mby1M Virtual Accelerator AI Investor Forum: Warren Packard, AI Fund
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