1Mby1M Virtual Accelerator Investor Forum: With Julien Nguyen of IT Farm (Part 4)

Sramana Mitra: The next question I want to ask you is about unicorn mania. You said you have three. You actually experienced being a seed investor in companies that have gone on to raise very large amounts of money at very large valuations. As a seed investor, you could get buried under later-stage liquidation preferences. How do you protect yourself? What are the dynamics that you see in these kinds of deals?

Julien Nguyen: We do a pro rata every time.

Sramana Mitra: But how much can you do? You’re still a very small fund. If a company is raising a $500 million round, it’s not easy for you to do a pro rata.

Julien Nguyen: I would say that if we take out the dilution that we get from the seed level all the way up to A, B, and C, our ownership will decrease big time. As the amount of money raised increases, our ownership decreases. Therefore, the amount of dollar is still pretty reasonable.

Sramana Mitra: So far, you have been able to do this?

Julien Nguyen: Yes.

Sramana Mitra: I guess the problem sometimes comes when there is less negotiating power in the hands of the seed investors and the later stage investors are imposing liquidation preferences.

Julien Nguyen: One other thing that we do is, we continue to bring value to our companies even when we become big. We actually bring customers, especially from the major Japanese companies with whom we have very tight relations.

Sramana Mitra: That’s differentiated.

Julien Nguyen: One of our companies right now is doing a big deal with Softec. We usually become friends of the company. They tend to treat us well because we treat the well. It’s a kind of mutual respect. To come back to your question on unicorn mania, we actually love it. This is one of the ways that we find an exit.

Sramana Mitra: Yes, this is actually a good point. A lot of investors will probably do better to exit instead of trying to go on to these later rounds. As I think about it, that’s my conclusion. Some of these investors should not go on. They should just exit.

Julien Nguyen: We know when to exit. The most important part of investing is to know when to exit. That is so crucial.

Sramana Mitra: Last question. We are in 2017. Lots of stuff have already been built. Nowadays there aren’t as many wide open opportunities to build these very large companies, but there are any niche opportunities. I’m sure there are numerous niche opportunities in digital health.

In some cases, my observation is that some of these businesses need to be built for small amounts of capital – $1 million and sold for $10 million or maybe $250,000 and sell for $5 million. Do you have appetite for these kinds of deals?

Julien Nguyen: I have to say no. The reason for that is you’ll never now how big a company will grow. You might as well spend the time solving the problem worth solving. Number two is, my worry is you aim for a small exit. Reality is always like 10% of your dream.

Sramana Mitra: I’ll push back on what you said about a problem worth solving. Let’s take the example of the entire electronic design automation industry. If you look at the total available market, it’s a relatively small industry. It’s a few billion dollars. It’s a problem that absolutely has to be solved because otherwise, there would be no semiconductors.

Julien Nguyen: Absolutely. It doesn’t have to be solved by startups.

Sramana Mitra: Today they don’t have to be solved by startups but at one time, these were startups. There are a lot of slivers of point problems that got stitched up. Cadence, for instance, was built by stitching together 27 acquisitions.

Julien Nguyen: We invested in EDA ourselves as well some time ago. Some time ago but not now.

Sramana Mitra: That is true. The EDA boat has sailed.

Julien Nguyen: To come back to your point, we’re not saying that it’s wrong to invest in smaller opportunities. It’s just not something that we like to do.

Sramana Mitra: It was a pleasure talking to you.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Julien Nguyen of IT Farm
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