1Mby1M Virtual Accelerator Investor Forum: With Nitin Pachisia of Unshackled Ventures (Part 5)

Sramana Mitra: VC firms are raising huge amounts of capital. The management fees are so big. They don’t really need to deliver any returns. They are just sitting and becoming fat with fat management fees.

Nitin Pachisia: To your earlier question about the trend in the VC industry, you have to decide as a VC whether you want to optimize for fees or optimize for carry. As a smaller fund, we’re optimizing for carry. If we do our jobs well, the carry is what’s going to generate the bigger returns for us.

As the funds that started off as miro-VCs and are now two $50 million funds, they’re optimized for fees. Whatever their thinking is, to generate carry, they have to return $250 million. If you don’t exit for $2.5 billion, my 10% is not going to be able to return the fund.

Sramana Mitra: $250 million is a small number. Then of course there’s Softbank. I just wrote on my Facebook timeline this morning looking at one of these Softbank articles. I said, “It looks like Softbank is going to own Silicon Valley, because with a few exceptions, every single company is going to end up exiting into Softbank.”

Nitin Pachisia: That’s a different phase. Even if we focus on the pre-Series A of investors, some of these started out as $15 million to $30 million funds. They are now $150 million funds. As VCs change their strategies and funds become bigger, there’re more fees but the strategy of execution then has to change. You can’t be investing in six times the number of companies that you were investing in before.

VC is not an endlessly scalable business. It’s not a tech business which scales. It’s a services business. We were very fortunate that we had the learnings from some of the greats in the business who told us, “You have to find where you tap out on bandwidth. You have to build the discipline to now go beyond that.” We get referred a lot of deals where they say, “Hey guys. This is a really hot company. Who’s who is in the company. You should come in with a $50,000 check.”

We think about it. It’s going to give us a logo on the portfolio page, but even if this company is as successful as everybody thinks it will be, it’s not going to return anything meaningful because the ownership is going to be nothing in this round. To your question, I came to the internal discipline about being true to who you are and operating with that mentality. A big part of that is practicing what we preach. Every VC tells founders, “You got to know your customers really well. You need to stay focused and execute.” We should practice that ourselves too.

Sramana Mitra: I agree. In whatever business you do, there’s no substitute for clear laser-sharp positioning and being very clear about what it is that you want to do.

This segment is part 5 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Nitin Pachisia of Unshackled Ventures
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