1Mby1M Virtual Accelerator Investor Forum: With Nitin Pachisia of Unshackled Ventures (Part 6)

Sramana Mitra: One last question, which is another trend. I would say it’s less visible. We are in 2017. Lots of stuff have already been built. Especially if you’re B2B investors, there aren’t that many wide open opportunities out there nowadays. Building another Salesforce.com is not that easy.

There are many niche opportunities. Some of these businesses need to be built for very small amounts of capital – $1 million to $2 million and sold for $10 million to $15 million. In some case, built for $250,000 to $500,000 and sold for $5 million to $10 million.

I’m encountering a class of investors who are actually looking at these. These are smaller TAMs. They are not 

billion-dollar TAMs. They are hundred million TAMs. Is this something you have appetite for?

Nitin Pachisia: I think there’re two parts to your question. One is a lot of development has happened in 2017. Where are the big opportunities? Then with what has happened in the last 20 years, the world has changed. Internet, mobile, and cloud have been the big enablers of where we are. That has opened up a lot of opportunities for incremental innovation. It doesn’t mean it’s not innovation.

It is innovation but it’s not as scalable as Salesforce was when it was built or even when Airbnb was when it was built. Imagine if today someone comes out with the idea of starting an Airbnb, which I’m sure you hear a lot of. It doesn’t make sense. The macro factors that helped Airbnb be there at the right time don’t exist anymore. It’s too late for those. The “Why now?” is a big element of disruptive innovation and investing in disruptive innovation.

The incremental innovation is still a huge component of entrepreneurship. You look at a lot of pitches from developing countries. The entrepreneurial ecosystem in developing countries is everybody is a mom-and-pop shop. They’re selling their services. Slowly they start becoming businesses and start hiring people.

What Internet, mobile, cloud, and other innovations have done is open opportunities for people to start and build either small software businesses, or software-enabled businesses, or just Internet-enabled businesses. You can build a great cash flow positive business in a short amount of time. That’s a great payoff for the entrepreneurs. I think more and more of that is happening.

At the same time, there’s room for disruptive innovation because as all things get solved, opportunities for new things open up. 60 years ago was when tracking things through satellite was first introduced. Today, almost our entire life is tracked by GPS. It has taken GPS 60 years to mature to this level where it’s inherent in our lives. A lot more technologies and products are still being built using that technology.

At a fundamental level, we’re seeing technologies like Blockchain, distributed computing, and AI moving from decision trees. Those open opportunities in industries where we’ve taken things for granted. Think airplanes. Growing up, we just saw airplanes as what they are. They take us from one place to another. Now there are companies coming up questioning that because there are new materials and new propulsion technologies available. Those will continue to create disruptive innovation opportunities. That’s where venture capital is the best fit because it’s high-risk. It needs patient capital.

For incremental innovation which will get cash flow positive in the near future, there’re much easier, cheaper, and better sources of capital available where investors will invest for cash flow.

Sramana Mitra: Not only that. There is another category. If you look at the technology companies or even large companies that have certain technology needs, there are specific niches within either software product portfolios or IT portfolio of larger companies where there are niche requirements. Oftentimes, you can actually build a product and get a few customers.

You don’t really invest in building the channel, which is expensive. You just go to market through somebody else’s channel. You are adjunct to their existing portfolio. You can leverage their channel. Maybe the TAM is $100 million to $200 million. For a corporate, a $100 million to $200 million product line where you don’t have to do the R&D is very attractive.

Nitin Pachisia: I hear entrepreneurs who started their businesses by solving a very niche problem at the company where they work. Then they realize that they can separate out and build a bootstrapped business around that. They either sell that back in or find eight companies just like that. That’s exactly what I meant.

Venture capital is not a good fit for that because those exits will not be capable of returning venture type returns. The risk profile is very different. I think there’re a lot of options for entrepreneurs today to raise money for those kinds of businesses. I know angels who are looking specifically for that.

Sramana Mitra: There are also micro-VCs who are also doing this kind of stuff.

Nitin Pachisia: That goes back to the earlier topic where we talked about a gap in the industry. What can we do, as VCs, to fill that gap? We can call ourselves VCs or we can call ourselves whatever the new category investor is. It will continue to happen as it comes in. Investors will follow it.

Sramana Mitra: It was a great conversation. Thank you for your time.

This segment is part 6 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Nitin Pachisia of Unshackled Ventures
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