1Mby1M Virtual Accelerator Investor Forum: With Warren Weiss of Foundation Capital (Part 3)

Sramana Mitra:  I hear a theme in what you’ve described – creative ways of playing the gaps or issues in the financial services market. I want to ask you for your thoughts on the small business financing market. I know OnDeck, to some extent, plays in that market for a particular category of companies. Lending Club even borders on a little bit of that market although it’s primarily consumer lending.

We work with very large numbers of small entrepreneurs and there’s a bit of a bubble in the Angel financing and seed financing area right now. In 2013, there were 70,000 angel finance companies and only 1,000 venture finance companies. In you look at the exit-oriented angel financing model, 70,000 exits are not going to happen. That’s not viable. A thousand venture financing exits are not going to happen.

However, if you’re going to get $100K or maybe even up to $1.5 million in the hands of small entrepreneurs, they can build robust businesses. They won’t necessarily build venture capital style, but they will build $10 million to $15 million businesses. That’s a completely underserved market.

Warren Weiss: Yes. This is also a fun one to tackle. There are many ways to make money in the world. I think you should deal with people that have built businesses before. There are many ways to crowdsource money from the Internet now and get people involved in these things.

If you’re dealing a world of not venture capital style returns but really nice returns, I think it’s very appropriate that you’re working with someone where you take enough money, but not too much money where you put yourself in a situation where you cannot grow to the size and the valuation that’s going to make your investors happy.

I probably spend a lot of my life talking people out of taking venture capital money, because not everything can be a unicorn and not everything can be a 10x return. If you’re a really small business, the first thing should be to be a very successful small business. The best way to do that is to get customer validation.

Whether it’s a technology business or you’re opening a hardware store, try to deal with experienced people. Your job is to not raise money. Your job is to build a company, but if you can find experienced people in a particular domain, you’ll be much better off.

Sramana Mitra: The synthesis of what you said is bootstrapping with customer money. Two is trying to get people who have experience in the domain involved in the business to get enough mentorship to be able to navigate efficiently.

Warren Weiss: Yes. That’s why you write books and I don’t. You’re clearer than me.

Sramana Mitra: OnDeck Capital is an interesting company because if you’re working in a domain where you have transaction revenue. You’re selling something that’s e-commerce or you know you have lots of transactions and you can show a track record of a certain threshold of transactions, you can actually get OnDeck capital to lend you money. This is working capital, essentially, that will help you break some of your cash flow issues. We are seeing some of that dynamic also in SaaS companies.

If you have a steady stream of SaaS contracts that you can show as evidence. And you do need to show 6 months or 12 months of evidence that you have been able to get business, then you could conceivably get receivables financing or contract financing based on these SaaS contracts as well. Working capital management is a nightmare for small companies.

Warren Weiss: No cash, no company.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Warren Weiss of Foundation Capital
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