1Mby1M Virtual Accelerator AI Investor Forum: Heriberto Diarte, Co-Founder and Managing Partner at Catalyzer Ventures (Part 2)

Sramana Mitra: Very good. So, folks, those of you who are listening, I want to just highlight one thing that Heriberto Diarte said earlier, that his VC fund is not interested in these shallow wrappers. Now, at 1M by 1M, we don’t mind wrapper companies because wrapper companies actually do fine as bootstrapped businesses. They don’t do very well as venture-funded businesses because the defensibility is not there.

To be able to build a venture-funded company, you cannot have 100 companies doing the same thing. But if you go into a low entry barrier business, you will encounter a lot of competition. Those dynamics are okay with bootstrapped businesses. They’re not okay with venture-funded businesses. So coming back to Heriberto, I know you have an investment thesis also around your fund size. Tell us more.

Heriberto Diarte: Well, our fund is relatively small. It’s a $100 million fund, so this forces us to be very disciplined. And if you look at our name, Catalyzer, our strategy is to catalyze companies across the chasm, where we invest is when the product is working, it can be in the lab, but we know that the product is working. We understand that the product is working, and then our value-add, given all the connections we have with large corporations, utilities, and the world in general, is to take that from where they are to commercial adoption. 

And what we want to hit is a company where they have proven unit economics. The unit economics are great, not in theory, but in practice, and then they have a huge pipeline of business, people knocking on their door trying to buy their solution. When they reach this point, the companies are on their way. So our goal is to catalyze them to that point.

So I don’t want to be in a situation where in the middle of this, the company runs out of money or needs to fund-raise $100 million and things like that.

So we will be very selective and choose only those companies with our money, with our LPs money, and our help can cross that chasm. So we have to be very disciplined in what companies we choose. And those companies can be doing something related with CapEx. They just need to be equity efficient to be able to do that.

Like we have a company in the construction industry, but 90% of the cost of their projects is financed with bank money. In that case, the equity is efficient, and they can scale up. So we are looking for those. We’re very disciplined to do that.

The second type of discipline is the entry price. If you find a great company, it doesn’t mean that it’s going to be a great investment. It depends on what entry point you invest in. So we walked away from deals where we were the main funder, or supposed to be the main funder, because it became a feeding frenzy. It became a very competitive process, and then the amount of money they were raising, and the valuation didn’t make sense to us anymore, and we just walked away from those types of deals.

Sramana Mitra: Now, how do you manage that dynamic? Because in Silicon Valley, that feeding frenzy happens very often. So if a deal looks good, the feeding frenzy is tremendous. So how do you manage this dynamic?

Heriberto Diarte: There’re three things. The first one is, which is a more generic one, we are able to find diamonds in the rough that are not understood by the main VCs. We have a lot of domain expertise and knowledge, and we’ve found situations where the main VCs who have never built a factory or managed things, who don’t come from the industry, don’t understand what the founder is trying to do and the value of what they’re trying to do. They try to explain it; many VCs don’t get it; and we get it because I would be the buyer for that technology, right?

I can understand if I had this, if I could install this in my factory or in my buildings, what would be the effect of that, and so on. So we found situations where people don’t get it, and we do, and then we have a one-on-one relationship with them. We’re almost like co-founders. We come in early, and we help them figure it out. That’s the first.

The second is that we have two offices. We have an office in Silicon Valley, and we have an office in Durham, North Carolina, and there’s a lot of technology in other places of the United States coming out of the RTP Research Triangle, coming out of Colorado, and other places where there’s not a lot of local VC money. So, we have first dibs on those technologies and entrepreneurs. Once they get to a certain size, they’re going to come and fundraise in Silicon Valley, and they can go to that feeding frenzy. But if it’s early enough, we can be one of the one or two VCs they’re talking to. That’s the second. 

And the third is just being decisive early. We’ve had one of these companies that we lost, that we didn’t invest in. They said, “Look, we would love to have you on the board. We would like you to lead our Series A.” But we hadn’t closed the fund. This was early in the year. We didn’t have the money to invest. If we had moved quickly, the entrepreneur would have been happy with us just to give him our money, and we would have been the only VC firm inside. 

This person was a mentee of my partner’s for many years. So he said, “I want you on the board. I want you to help me do this again.” They’ve had a very successful past together. But because we couldn’t invest, he went to the market, and then he realized, “Oh, I have something big.”

It’s not that he would have sold to us at a bad price or conditions. We’re going to be very fair for the stage of the company. The amount of money that he raised at the valuation that he raised is insane, and they might have trouble down the road because of that. So it’s short-term gain for long-term problems, I think. He would have been better off with us, with people who understand what he’s trying to do. And so if we can be nimble and fast, we could also get some of those deals.

This segment is part 2 in the series : 1Mby1M Virtual Accelerator AI Investor Forum: Heriberto Diarte, Co-Founder and Managing Partner at Catalyzer Ventures
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