1Mby1M Virtual Accelerator Investor Forum: With Jon Staenberg of Staenberg Venture Partners (Part 4)

Sramana Mitra: People are scrambling. There are a lot of people in the industry who are also scrambling to put in little bits of money. By the time you get to raising Series A, you’ve raised six rounds of financing already.

Jon Staenberg: I love to refer to the millennial problem. Pivoting, sometimes, is a completely appropriate response, but you have limited amount of money. You haven’t raised enough money. You pivot twice. Guess what? What do you have? I do get those calls. People say to me, “Is this fundable now?” You should have asked that question two pivots ago.

Sramana Mitra: That’s what we do here in the program. We focus on fundamentals and focus on customers and

 revenues. At least, be able to show that we have a path to velocity if it’s a company seeking funding. If there is no path to velocity, we discourage people from going after funding. You can still build a business, but you shouldn’t be raising funding if it’s not high velocity.

Jon Staenberg: Two things. People get money and they assume that it doesn’t matter how much they got. You know you’re going to fall short. It takes a lot of discipline. A lot of entrepreneurs are optimistic. I have a great company. We’re down to their last few dollars. They needed to raise. They raised from one of the larger rounds, but it was a down round. Now they’re on a run rate to do several hundred million dollars. That is the exception. That was several years ago.

Sramana Mitra: What do you think of this unicorn mania? Seed investors could get buried under later-stage liquidation preferences. How do you protect yourself?

Jon Staenberg: I actually like some of the unicorns.

Sramana Mitra: You sell?

Jon Staenberg: I sell and I buy.

Sramana Mitra: I don’t think the audience is understanding. Explain what you mean by buying and selling.

Jon Staenberg: It’s harder than ever to go public. There are companies out there that have these big valuations and there’s a variety of reasons why they have that valuation. There are opportunities to take liquidity as an angel investor. There are also companies out there that I think are going to be worth a lot more than they are today. Just because they’re not public doesn’t mean they’re not great companies. I’ll go in sometimes and buy shares of those.

Sramana Mitra: In the secondary market?

Jon Staenberg: Yes. This is about ROI. I think there are some great opportunities within those. There are lots of unicorns that are not unicorns.

Sramana Mitra: Cooked up unicorns. In those cases, the right strategy is to sell out for early stage investors and just get out. If entrepreneurs have found someone to put in that kind of money and valuation, they should also sell good chunks of their ownership and take liquidity.

Jon Staenberg: This goes back to the fact that 15 years go, hedge funds were playing in our space. There is money coming into the system that was officially not there.

Sramana Mitra: There is a tremendous amount of money in the system right now. Even in the early stage game or anybody who has raised a little bit of money, there’s a lot of those in the market. You could be taking money from a lot of people but be careful from whom you take money from and with what investment thesis and expectations.

Jon Staenberg: Not to mention the different angel groups that have started. The world is awash in money right now and looking for a place to put it. Like the wine business, venture and angel investing has been perceived from the outside as sexy and lucrative when the vast majority has not been.

Sramana Mitra: The thing that’s mathematically incorrect in this industry that drives me crazy is that there are 500 micro VCs and probably another 500 Angellist syndicates who all think they’re going to find unicorns. It’s mathematically not viable to find that many unicorns.

Jon Staenberg: That’s correct. People will often ask me about, “Would you be invest today to get a $20 million outcome?” Maybe I’m not shooting for a $20 million outcome, but $300 million is often a fantastic outcome. I am looking for a reasonable multiple. I have done this so long. I know I have 10x or more to make up for a lot of bad deals.

Sramana Mitra: There are investors who are playing for smaller exits. Smaller exits are often derived out of smaller TAM’s. There aren’t that many $10 billion TAM companies but there are a lot of $100 million TAM companies where you can get these smaller exits but get decent capital efficient ventures that can be called successes.

Jon Staenberg: By the way, I’ll remind people that when Facebook came out in the public market, you could have bought it for $20. Today it’s $170. For those angel investors listening, you ought to think about that as well.

Sramana Mitra: Thank you very much. It was a great conversation.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Jon Staenberg of Staenberg Venture Partners
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