1Mby1M Virtual Accelerator Investor Forum: With Greg Sands of Costanoa Ventures (Part 5)

Sramana Mitra: I think this whole unicorn mania has been created by the sheer stupidity of the entrepreneurship media. They’re so driven by funding announcements. Every time somebody has a funding announcement, they run up lots of articles about the funding announcement. Entrepreneurs mistakenly believe that funding announcements are good. It’s not necessarily good. If you raise too much money, you price yourself out of the market.

Greg Sands: That’s right. It seems crazy to not maximize price but I think what ends up happening is you can take a higher top-line price with a bunch of structure and more preference stack or lower price that doesn’t have multiple preferences or other things. You can find partners who want to help you build the business that you want to build as opposed to saying, “I’m here to provide rocket fuel.”

Founders and CEOs can say, “This is the plan we want to sign up for. We think that’s the one that optimizes value and is consistent with the business that we want to build.” We could do things in ways that are sloppy or that are excessive and temporarily get unicorn status.

Sramana Mitra: It’s not sustainable. My last question follows from what you were talking about earlier about the opportunities in AI. This question is not just AI-specific. One of my observations is lots of stuff have already been built. Nowadays, there aren’t so many wide open opportunities out there.

There are many niche opportunities with smaller TAM. They are $100 million to $200 million TAM opportunities. Some of these businesses need to be built for small amounts of capital and sold for lower exit prices. Is this something you consider or something outside of your purview?

Greg Sands: That’s a great question. It’s a great question for founders to think about themselves in the context of financing processes. The answer is a little bit both. We aspire to be involved in the biggest and best companies in our sector. We are excited about looking for things that, if they worked, have platform or network effects. Those things are exciting for us.

On the other hand, I would also point out that upfront TAM analysis in early stage companies is really hard and sometimes misleading. Judging TAM proper ly is difficult. I’m much better at assessing product and product-market fit than I am with TAM. I’m pretty much willing to live and die with those skills. I do think that in a fund like ours, there are things where it’s a few million dollar outcomes. We hope that having earned yourself into the later stages of the company, you might find adjacencies. Those don’t work in the context of the bulge bracket venture firms. It doesn’t work at Sequoia.

I do think that a founder who is in one of those markets should recognize that TAM will be a problem. You’ve to capitalize it in a way where if it turns out that you’re selling it for $100 million, it works for everybody. It will be harder to raise capital. I’m thrilled that the set of seed firms, incubators, and accelerators are providing some set of resources to those kinds of companies. I think people who are really institutional venture capital will have a hard time making their fund work.

Sramana Mitra: That’s right. Because there is such a proliferation of accelerators and micro-VCs, I’ve seen some investment theses that invest $1 million to $2 million and not raise any institutional venture per se and just exit right away for $10 million to $15 million and take a good multiple. There’s a lot of experimentation going on.

Greg Sands: There absolutely is. It can very well be the case where that is a very significant exit. It’s real money and it gives one a track record to, in their next company, take a bigger swing and have more access to capital and talent.

Sramana Mitra: Given how much emphasis the ecosystem places on bootstrapped validation, having some capital available from a previous venture to bootstrap the next venture is a very good strategic move.

Greg Sands: Absolutely.

Sramana Mitra: Any parting comments for our community of entrepreneurs who would be interested in working with you?

Greg Sands: The most important thing is that you’re focused on the main thing. The main thing is understanding customers and their problems and building stuff that is of value. If you do that, everything else will come with it. We love working with product-oriented founders who can help us understand the problems they’re solving and why.

Sramana Mitra: Thank you for your time.

This segment is part 5 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Greg Sands of Costanoa Ventures
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