1Mby1M Virtual Accelerator Investor Forum: With Jonathan Lewy of Investo (Part 4)

Sramana Mitra: How do you parse unicorn mania? As a pre-seed investor, you could get buried under later-stage liquidation preferences. Even with your special investment vehicle, you could get buried under later-stage liquidation preferences. How do you protect yourself?

Jonathan Lewy: We know the risk. We believe in the relationship we’ve built with the founders. I know it’s not always in the hands of founders. That depends on the term sheet. We hope to invest in the right people that would end up doing the right thing.

Sramana Mitra: As it stands, some of the funds of your size are looking at these opportunities very carefully. They don’t really go beyond Series B. When a Series B is being raised, they take their multiples and just sell out to the Series B investors. That mitigates the risk there.

Jonathan Lewy: It also depends on what stage you are in your firm. The second fund is only one year old.

Sramana Mitra: You’re very young.

Jonathan Lewy: The first fund is on year three, which is always a good year. We have a very good ratio of the companies that have already raised Series A. In fund two, we are only on the first year and we already have a Series B. I would say that if we had an opportunity to come out of a company, we will not take it. We still have many years in front of us for the fund. In years six to seven, if we have an opportunity to get out, it might be a good option. As a fund, we need to get out.

Sramana Mitra: It’s taking time. It takes time to get to Series A. Given the metrics these days of a significant $5 million to $10 million Series A, it takes time to get there. You could very well be in year five or six before Series A.

Jonathan Lewy: Yes. We have a very good relationship with our companies. We like to talk to them.

Sramana Mitra: I think being open to some of these opportunities would be a good idea for a young fund so that you can protect yourself and not get exposed to some sort of a run out, which is happening a lot these days.

Jonathan Lewy: There’s a big difference also between funds that only put a ticket and then wait versus funds like us that are really close to the founders. We usually know what’s going on in the company.

Sramana Mitra: You know now. As your companies get beyond Series A and they start hitting their stride, you will know less and less probably because people get busy. Investor relations is a very time-consuming affair. What is possible in the early stages may not be as easy to do in the later stages. You’re going to have to play it by ear.

Jonathan Lewy: I totally agree. I can only speak about our experience in the last four years. We only started four years ago. Up to now, we have been able to maintain good relationships. I cannot say what will happen in another three years. I hope that we can maintain the relationships and continue to bring value. We are aiming to create a brand for Investo. That’s the best way to know about a fund – talk to their portfolio companies.

Sramana Mitra: Let’s talk about a different topic. We are in 2017. It’s not like we have new Facebooks coming up left, right, and center. Lots of stuff have already been built. Nowadays, there aren’t so many wide open opportunities out there. There aren’t as many big discontinuities like when the iPhone came to the market, the smartphone category opened up. Same thing happened with cloud computing. Same thing happened with social media. These were major discontinuities.

At the moment, there isn’t another major discontinuity like that which has that level of impact. AI is big. It’s a big trend, but it’s a very different kind of opportunity than a smartphone coming into the market. However, there are a lot of niche opportunities.

Because there is a basic infrastructure that is in the market, there are a lot of small niche opportunities. Some of these businesses need to be built for small amounts of capital – $1 million and then sold for $15 million. In some cases, $250,000 and then sell for $10 million. Do you have appetite for these types of investments?

Jonathan Lewy: It really depends not only on what they’re doing but also why they’re doing it. If I take the example of Rappi, it’s a sector that we know pretty well. First of all, the vision they have is really to transform the way you can get anything you want in Latin America. The reason why it’s a product in Latin America the in US is because of the cost of labor. I guess that’s how they were able to raise money from those big names. There’s a real vision of where they want to bring the company.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Jonathan Lewy of Investo
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