1Mby1M Virtual Accelerator Investor Forum: With Ken Elefant of Sorenson Ventures (Part 4)

Sramana Mitra: How do you parse the Series A gap that has come about in the market? There’re a lot of early stage, pre Series A investments. In fact, there’s a tremendous segmentation that has started to take place in the pre-series A space right now. There is the friends and family round, but then there are funds that are focused on pre-series A such as pre-seeds, seed, post-seed, pre-series A . 

There are micro VCs that  are picking certain areas of the pre-series A phase, but then the number of companies that actually get funded in Series A remains relatively constant in the 1,200 to 1,500 range, whereas in the pre-series A, there are 70,000 investments a year. How do you analyze that?

Ken Elefant: I completely agree with that. That’s exactly where we saw a gap in the market for traditional Series A investors that would roll up their sleeves and help founders and CEOs with getting their initial customers and partners. It’s like being a mini-McKinsey of sorts and helping them work through the different product strategies and helping them focus on different markets, being a recruiter, and helping them bring in their VP level talents.

They’re like a mini-investment bank to help them think about their fundraising strategy. Sorenson Ventures is positioned as a traditional Series A investor that you used to see from 10 or 15 years ago, so we’re perfectly happy if the round sizes were anywhere between $2 million and $10 million.

We can either do it ourselves or we can syndicate it with another firm, but what we’ve seen in the market is that there’re a lot of other good VC firms that have raised larger and larger funds and what they like to invest in are companies that actually have 10+ paying global 2,000 customers. That’s where we can help.

Sramana Mitra: So you don’t necessarily need that much validation. You’re saying that you’re willing to do deals that have a lot less validation as a Series A deal?

Ken Elefant: Completely. Two of the three deals that we’re in the process with at Sorenson Ventures are completely pre-revenue.

Sramana Mitra: When you are doing a pre-revenue deal, what do you look for in terms of customer validation?

Ken Elefant: Having worked at both Battery Ventures and Lightspeed Partners, as well as as Intel Capital, one of the things that Sorenson Ventures has is really good connections into the Global 10,000 Chief Information Officers and Chief Security Officers.

So when we start to do due diligence on deals, we talk to the potential of the customers that the startup has. We also make introductions to our friends in different firms to validate the problem in the gap in the market. That is the best way that we can do due diligence. It’s also the best way for us to add value to the companies that we are potentially investing in.

For example, during the due diligence process for one of our security companies, we introduced them to one of the Chief Security Officers of a Global 2,000 company. It turns out that that company is going to be a data customer for the startup and that’ll happen during our due diligence process.

Sramana Mitra: How do you parse the unicorn mania? As an early stage investor, you could get buried under later stage liquidation preferences if a company gets in this mode. How do you protect yourself? In general, what is your perspective about the crazy behavior that has come about in the market recently?

Ken Elefant: It’s a really, really good question, because what I’ve seen in the past is there’re a lot of early-stage funds that really don’t do a great job protecting their positions. They don’t reserve enough for their funds. At Sorenson Ventures, we reserve half the fund for follow-on investments. That allows us to do follow-on rounds for well-performing companies. We can continue to invest and load up the companies.

Sramana Mitra: So your strategy with unicorn mania is to just participate in it.

Ken Elefant: We would participate in rounds if we thought that in those later rounds you also could get a 10x plus return.

Sramana Mitra: Having both venture and growth capital within the fund allows you to do that.

Ken Elefant: The way that we would do it is Sorenson Ventures has its own reserves set up for each of its investments. Then Sorenson Capital, as the late-stage firm, would look independently at the company and if they decided to invest, then they can invest independently.

Sramana Mitra: Very good. Thank you very much for coming.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Ken Elefant of Sorenson Ventures
1 2 3 4