1Mby1M Virtual Accelerator Investor Forum: With Oded Hermoni of Rhodium Venture Partners (Part 3)

Sramana Mitra: We are in 2017. Lots of stuff have already been built. Nowadays, there aren’t so many wide open opportunities for doing fundamental things the way Salesforce or Facebook did it. The incumbents are incredibly powerful. They have monopolistic power.

We have a lot of capital in the system right now. If you’re managing a chunk of money, you have to think of an investment thesis of where you can really get returns. One of the observations I’ve had is that if everybody is chasing unicorns, it’s not going to work because there aren’t that many unicorns. Unicorns, by definition, 

should be rare. Right now, we have a lot of pseudo-unicorns because a lot of artificially-bloated companies have come into the market. In the private market, there are tons of artificially bloated pseudo-unicorns.

This aggressive goal of trying to invest in unicorns is not going to end very well. There’s going to be a lot of casualty in the process. However, there are a lot of niche opportunities. Some of these businesses need to be built for small amounts of capital.

Maybe $1 million to $2 million and then sold for $10 million. In some cases, maybe even smaller – built with $250,000 to $500,000 and sold for $5 million into those corporates who have need for adjacent products that are not part of their current portfolio. How do you view those dynamics and those opportunities?

Oded Hermoni: It’s a good question, because we are now thinking of raising funds from other investors and not necessarily from just the family. We started to think, “What are the most interesting aspects of this?” First of all is leveraging the different geographies. This enables flexibility for us.

In Israel, we seek companies who would not necessarily become unicorns but need much lower capital to get into a significant exit of $100 million to $500 million. In the US, you see different kinds of companies. It’s really about regions. In Silicon Valley, we see companies who are trying to be unicorns but need so much money to get there. In New York, we see companies who might be relevant to specific industries.

I agree with you. There are companies that need $5 million. There are companies that need $30 million. It’s about the entrepreneurs. Technology will change and startups always pivot. It’s about investing in people and having the access to those people that you can really invest in.

Sramana Mitra: You’ve answered the question more from the point of view of how you view your fund and how you pick your investments. I’m asking a more slightly nuanced question. I do think there are more niche opportunities in the market right now than these very large opportunities.

Oded Hermoni: I totally agree with you. We see about 2,000 companies a year. We invest in about three to four. Each one of them will be a bit different. Some of them will be an opportunity of a certain size but a much more secure one. In some of them, we look for the big thing. I agree with you. There are lots of opportunities.

We see all of them and from them pick what really fits our needs. One advantage we have is that we invest in the US and expats in the US. Having access to them and their perspective on the world and how they execute it is something that we really believe in. I still believe in people.

Sramana Mitra: How do you parse unicorn mania as an early stage investor? If you invest in a seed round or a pre-Series A round, you could get buried under later-stage liquidation preferences. Have you encountered this situation and how do you protect yourself?

Oded Hermoni: I have enough capital to protect myself down the road. I’m not the typical fund that is limited in the number of participating rounds they have. In that way, we are protected. In good companies, we are always eager to invest more down the road.

Sramana Mitra: Your answer to this is you participate in later rounds and you have enough deep pocket to be able to protect your ownership through participation.

Oded Hermoni: That’s right. Those companies have ups and downs. When the father of my partner invested in MobilEye 17 years ago, who could imagine that autonomous cars would be so important and that this company would be acquired for $15 billion. You need to be very patient with those cycles. Some are instant unicorns and we saw some of them falling apart. Building a real company takes a while.

Sramana Mitra: It takes a long time, yes.

Oded Hermoni: For example, I was an investor in a company that did a big exit. They did a $1.1 billion exit a couple of months ago. I was not involved in that group anymore. My lesson is to be patient. Build your investment vehicles for long term, have enough capital to support those companies and also start from double digits. If you start from less, then you have less to protect.

Sramana Mitra: That gives us a good understanding of your activities. Thank you for your time.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Oded Hermoni of Rhodium Venture Partners
1 2 3