Seed Capital From Angel Investors: Brian Garrett, Co-Founder And Managing Director, Crosscut Ventures (Part 7)

By guest authors Irina Patterson and Candice

Irina: What your usual round size?

Brian: I would say that $500,000 to $1.5 million seems to be the magic number for seed rounds; therefore, the valuation could be as low as $1 million and as high as $4 million or $5 million for that level of dilution that I just talked about – the 20% to 40% range.

Irina: Do you think in terms of the potential rate of return?

Brian: Yes. I think every investor has been trained to think, can this be a 10x or greater? Obviously, the reality is most deals don’t end up that way. The history of venture [capital] is based upon, usually, one or two deals  that have very high multiples make the entire fund. The rest are either failures, or you get a modest return.

I think we have to go into every opportunity and believe there’s a 10x potential. But we also, because of the micro cap philosophy, are still able to get those ten-timers at $20 million or $40 million exit values, which is where the traditional $100 million plus venture funds cannot achieve that.

They need to invest more per deal; therefore, the pre-money’s higher,  and in turn the exit value that needs to be achieved to get that 10x is in the $150 million or $200 million range.

I think that’s where the venture model is flawed with the traditional fund sizes. And I think that’s why these micro cap funds are getting a lot of attention.

Irina: At what stage of a business’s development do you prefer to invest?

Brian: We prefer to invest with some sort of product and metrics and milestones. For successful, multi-time entrepreneurs, we’re willing to take pre-product risk, as long as their domain expertise can validate that the new thing that they’re trying to do has a big enough market and that they have the right set of relationships to get there.

We’re primarily the first money in to most of these deals, but there are some that we do on PowerPoint pitches, and there are some that we do after they’ve been able to bootstrap their way to an initial product and get some customers using the platform or solution to then validate that there’s a scalable business behind it.

Irina: Do you have any numbers for the total available or total addressable market?

Brian: I’m not going to give you the traditional venture answer, which is it has to be a multi-billion dollar industry to go after. Again, part of the micro cap philosophy is that there are very viable and strategic businesses that could built on potentially smaller market opportunities but much smaller dollar amounts to hit meaningful milestones to create value.

I certainly would invest in a company for which the TAM is $250 million. One hundred million, might be too small, but that’s not the driving factor in our decision to invest. It’s more about, Is there a scalable business that goes along with this idea, and how much capital do you need to get it to some meaningful level of revenue or progress or traction?

Irina: What about niche markets, like $20 million? Really small but really targeted ones.

Brian: No. I think the general thought on that is that if it’s a niche market, the potential acquirers are limited, and there’s still a lot of risk that you would be the dominant player in that niche and capture 100% market share. Even if you did, you’re still just a $20 million business with a limited set of acquirers.

We really like these opportunities to be much broader and have a broader set of people who could be interested in what they’ve built for acquisition. So, TAM is definitely a factor. I don’t want to downplay that. I just don’t believe that you have to have a criteria that it has to be a multi-billion dollar TAM or I’m not interested, because I just don’t think there are that many TAMs that are multi-billion in size.

Irina: Do you require entrepreneurs to be experienced?

Brian: We have backed in our first portfolio, many first-time entrepreneurs – Jason Nazar at DocStoc, Ofir and Ari at GumGum. These were young, aggressive entrepreneurs with a vision and a passion, not necessarily a track record of success previous to that. I think if they’re able to hit some meaningful milestones on their own and bring in credible people, they’ve shown that they can get it done, so [experience] is not a criterion.

This segment is part 7 in the series : Seed Capital From Angel Investors: Brian Garrett, Co-Founder And Managing Director, Crosscut Ventures
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