1Mby1M Virtual Accelerator Investor Forum: With Nitin Pachisia of Unshackled Ventures (Part 3)

Sramana Mitra: What about the vehicle? Are you doing equity investments or convertible notes?

Nitin Pachisia: It’s a mix. We like to do more equity and less convertibles but we work with the founders on whatever is the best solution for them is. Our preference is to do equity and we encourage founders, even for their subsequent rounds, to do price rounds versus layering up notes over notes.

Sramana Mitra: How do you process the current investment climate where capital is moving further and further upstream? How does a pre-seed or a seed investor mitigate the Series A gap?

Nitin Pachisia: What’s going on is really exciting. There’s a major shift going on in the VC industry. I think this is a great time to be an entrepreneur because you have more choices today than you’ve ever had in the past. You look at a new class of pre-seed funds now coming up to fill the gap that is left by seed funds moving later. You have platforms coming up which enable angels to discover companies and companies to discover angels.

You have seed extension funds that have come up to fill the gap left with the Series A funds expecting more progress. I think this is a fascinating time. What it’s doing is it’s making everybody adjust. For instance, there was an explosion of seed funds a few years ago. I believe there were 400 plus micro-funds. What that did is there was too much capital being invested at seed which should happen because seed is about experimenting a lot. There were too few funds left to do A’s and it created a real Series A crunch.

Over the last few quarters, what some of these seed funds have realized is, there’s a real opportunity for us to move to A. They want to write larger checks. You’ll increasingly hear them saying, “We’re seed and Series A fund.” I think it’s creating real opportunities for people to look at where gaps are and how they can morph to fill those gaps so that they are adding more value on all sides. If you think about it, investing is a commodity business.

Everybody is selling money and trying to buy equity in your company. Therefore, entrepreneur is the king because they get to decide who is the investor they will partner with and buy money from by selling their equity. When that happens, investors are forced to think about the value that they bring.

How do I differentiate my money from everybody else’s money? We’re seeing the evolution of the value-add investors. Value is different for the entrepreneurs. The bigger firms have their brand. Founders who seek that as the primary value will take that. Some others are competing on price. Founders who seek better valuations will partner with them. Then, there are firms that offer operation value. They’ll partner with entrepreneurs who are best aligned to that value.

Ultimately, what that leads to is a value-based ecosystem. That’s not to say that there’s not a whole lot of me-too’s as well. There are and there will always be. It’s fascinating to see all these changes happening at the same time, creating a lot more choice and a lot more value.

Sramana Mitra: We almost have a five-stage ecosystem before Series A – friends and family, pre-seed, seed, post-seed, and pre-Series A. Then either small Series A or large Series A.

Nitin Pachisia: It’s a part of commoditizing because there’s a lot more awareness. In the good old days, there were a few firms. It was easier for everyone to fall into one of the three buckets. Even within seed investors, you will hear, “We do late seed.” Because that differentiation is becoming more difficult, investors have defined their niche because if they don’t, entrepreneurs will not find them.

Sramana Mitra: People are defining niches. I agree with you. It’s a healthy trend. I recently spoke with an investor who made a pretty good distinction of where he plays. They play post-seed and pre-Series A. I asked how to differentiate between the two. They consider post-seed as traction but not necessarily velocity while pre-Series A is traction plus velocity.

Velocity risk is a big risk. It’s a big determiner whether you are a venture scale company or not. If you’re not, you shouldn’t be raising Series A.

Nitin Pachisia: There’s a whole lot of different phenomena going on. Obviously, hype cycles play a role in that. Clearly, there’re new definitions and new niches being carved. In some cases, they are right. If you want an entrepreneur who falls in that category, they are the right value investors for you.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Nitin Pachisia of Unshackled Ventures
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