1Mby1M Virtual Accelerator Investor Forum: With Sunil Bhargava of Tandem Capital (Part 2)

Sramana Mitra: The question is more about trends. In the companies that you’ve seen, what are people working on that are interesting?

Sunil Bhargava: It’s extremely broad. We have companies in the construction space. We have companies in the food space. We have companies in the transportation space. Now you hear a lot about Blockchain. I think it’s a very wide spectrum. The best way to get a better sense of the breadth of the companies is to go and look at the variety of different types of problems that are being addressed by a single YC class. You look at that. There are a hundred companies in there. There are B2B and B2C.

One of the companies we’re looking at right now is funding student education. It’s all over the place. That’s why we focus on channel innovation because that’s the commonality of most of these things. The ones that just have a better mousetrap have a harder time breaking out to venture scale companies.

The ones that have channel innovation in addition to product innovation are the ones that tend to break out. Because of Facebook, Google, and other mechanisms, inside sales is getting simpler and  better.  All of those are leading to different ways of selling but you have to get a very clear value proposition for the buyer.

Sramana Mitra: Would it be fair to say that in the types of entrepreneurs that you are interested in investing in, channel innovation is one of the key requirements?

Sunil Bhargava: Absolutely. For us, that is very important. We look at how is the ecosystem for selling certain products changing.

Sramana Mitra: Could you also double-click down on stage for us? You said you put in a million dollars in a $2 million to $5 million round. What are you looking for? If it’s a SaaS deal, are you looking for a certain ARR number. A lot of funds have benchmark on what ARR numbers they’d come in at. Do you have certain metrics that you are anchoring your investments to?

Sunil Bhargava: The first stage which is prior to where we come in is where the team comes together, you build enough of a product to demonstrate that there is a business. You have a thesis as to how the business is going to grow quickly enough. When we come in, we assume that to get to your A round, you need to have probably a million in ARR with 50% plus margins and a 3x growth rate. If you’re at $300,000 right now, you’re going to be at a million in 12 months.

In the marketplace, it might be something different where if you had a million a month in GMV. You have about 12% to 15% margins and 3x growth. That would be something that the Series A guys would be interested in. When we invest, we look at what evidence you have that shows us that you can get to some of these numbers.

Usually we want to see our deals get from where we are to a Series A in nine months on average. Some might get to it in six. Some might get a little longer. That’s what we look at. Based on what your go-to market is, that’s how we look at it.

Sramana Mitra: But you don’t consider yourselves as Series A investors?

Sunil Bhargava: No. For Series A today, people expect evidence of scale. They want to see significant growth. That’s really important. If you go and tell them, “We have a $20 billion market.” If you’re growing at 1x or 2x, there is no evidence that there really is a big addressable market.

Most of the quality Series A guys are looking for growth. A lot of the companies that come to us have shown that there’s a business. They’re very clear on why somebody is willing to pay them money and they have a thesis that this is how they’re going to expand the growth. One of our companies is in the RV rental space.

When they came to us, they were a marketplace company. They had $100,000 in GMV. They had a reasonable business. That wasn’t an interesting business to any Series A company. We understood the innovation both on the channel side and the product side. Now they’ve done $20 million in GMV in 14 months. That’s an outstanding example, but those are the kinds of things that we are interested in.

This segment is part 2 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Sunil Bhargava of Tandem Capital
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