1Mby1M Virtual Accelerator Investor Forum: With Cindy Padnos of Illuminate Ventures (Part 4)

Cindy Padnos: We structure our seed investment with, at most, three other co-investors, but typically have one co-investor. We think it’s really important to be investing with like-minded investors.

It’s also a bit dangerous to have a very large fund writing a small check into your seed round. It’s a significant signaling risk if that fund doesn’t come back to lead the Series A. The question is why not. It might not have anything to do with the company. It might be as simple as the fact that that partner had another company that they financed three months ago and they just can’t take on another new investment right now.

Sramana Mitra: What you’re talking about is this trend that has come together in the last decade – spray and pray. There are lots of funds that are putting a little bit of money in a lot of deals and just not taking any Board seats or any real skin in the game. That has become very popular right now.

Cindy Padnos: We invest with conviction.

Sramana Mitra: Which is the classical venture capital way. Switching gears a little bit, how do you parse unicorn mania? As a seed investor, you could get buried under later stage liquidation preferences when the company gets flushed with capital. The company becomes a hot company and gets on the radar of the bigger funds. They just flood it with capital. There’s also all these terms. How do you protect yourself?

Cindy Padnos: Most of the unicorn companies are in the consumer internet world which is not a world that we operate in. We invest only in the enterprise world. Relatively speaking, the likelihood of that happening to us is much lower. It is by choice. We fully understand that we prefer to invest in more capital efficient companies.

Even our company that went public raised less than $100 million to get there. We have another company that’s running at an $80 million run rate that just took $60 million to get there. They’ve been profitable and cash flow positive for three years. It’s not impossible for us to be investors in a unicorn. In fact, we have one in our portfolio.

Since we’re typically investing at sub-$10 million free money valuation, when companies get to be multi-hundred million valuations and new investors are trying to get in as much as possible, we do have an opportunity to take some liquidity from time to time. We have, more than once, chosen to do that. Typically, it’s just a portion so we’re still along for the ride but we’ve already seen a nice outcome.

Sramana Mitra: You have co-sale rights with the founders.

Cindy Padnos: We don’t always exercise them.

Sramana Mitra: One point I want to make is that unicorn mania is not just B2C. Unicorn mania is happening in B2B as well. We’ve seen a lot of companies that are completely flushed with capital at the stage they get traction and become prominent.

The other point that Cindy just made is as you’re negotiating your early stage investment, you have to make sure they don’t stand to get screwed if you are successful. One of the ways investors like to protect themselves is with co-sale rights that they may or may not exercise. At least, they have those rights so they can be whole in this process.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Cindy Padnos of Illuminate Ventures
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