1Mby1M Virtual Accelerator Investor Forum: With Laurel Touby of Supernode Ventures (Part 2)

Sramana Mitra: What have you invested in? Give us an example or two and tell us why you chose to invest in those.

Laurel Touby: We are about to close the first close of our fund. We’re now looking at investment for that fund. In my angel investing, you can see some indicators of some  companies that I invested in personally that have been doing really well. One of them is a company called AppBoy which is in marketing tech. I did it five years ago. It wasn’t quite as crowded as it is today.

It has changed its name to Braze. It’s basically software to help marketers reach out to their community via the app. It’s managing your community of users better through your app. It’s analytics. It started out as doing one or two things. Another one is Credijusto. It’s a small business lender in Mexico. It’s helping small businesses get access to capital. They borrow against their homes.

Sramana Mitra: In the last three months, you have a deal flow. What are the highlights of what you’re seeing in that deal flow?

Laurel Touby: I’m noticing a lot of companies that are disrupting existing companies. Ten years ago, you didn’t have TicketMaster. Now, those are considered old technologies. What we’re seeing are software companies that are new kids on the block that want to disrupt those companies that were out there just 10 years ago.

I see the path of innovation moving quicker and quicker. We’re not going to wait 25 years to launch another TicketMaster. TicketMaster will get disrupted now. The incumbents have to look over their shoulders or they have to acquire these companies that are up and coming.

It’s Moore’s Law. Things are moving faster. I’m noticing that already. I’m shocked that some of the companies coming here are saying, “We’re disrupting TicketMaster.” You really have to take a look at them because they might just do that. They might do it and you won’t be part of it.

Sramana Mitra: It’s an interesting way to go to market because there is not just a product out there that is entrenched but there is already a whole organization around it. When people want to go into something similar, the disruption process is a known cycle of disruption.

It’s a matter of convincing the market that you have something better. If there is already awareness about the need and pain point, you don’t have to establish that pain point again.

Laurel Touby: Not necessarily. A lot of people think it’s done. Ticketing is solved. There’s actually a bias.

Sramana Mitra: Of course, there’s a bias. That’s why you need a go-to-market strategy that can effectively dislodge the whole ecosystem around it. People do understand that they have to sell tickets online and that is one of the ways they get people to their shows and concerts. When TicketMaster started, they had to create that understanding.

Laurel Touby: Then there’s disruption of industries that previously hadn’t been disrupted. There’s still room for software and insurance tech. There are all kinds of areas that still has room for new people to come up and solve problems there. We’re just putting our fingers out there and try to find all kinds of founders to come from those industries who understand those industries.

Sramana Mitra: How do you process the current investment climate where capital is moving further and further upstream? How does a pre-seed investor like yourself mitigate the Series A gap?

Laurel Touby: The 22 companies in our portfolio are very early stage. I plan to take my learnings through those investments and basically do a better job on my first institutional fund. That’s why what we’re doing in our portfolio construction is looking at companies that have valuations lower than $5 million. We have to be valuation-disciplined.

We are offering our limited partners access to the pro rata rights. We’re giving them access to invest as the winners come of that group. You’re going to have a lot of failures. If we do it right, we’ll have a huge number of companies that are going on to their Series A and beyond. We’re going to offer our LPs access to those companies to invest in them. I’m not quite sure if I answered your question.

Sramana Mitra: There are several ways of answering the question. I’ve heard responses from people who are doing pre-seed or seed funds. One is doing pro rata participation. It’s very difficult for small funds to do pro rata participation. If you have five rounds of funding before a real Series A, you dilute the company hugely and it’s very difficult for small funds to keep participating.

The other answer I hear a lot is the pre-seed funds are perfectly okay with selling out to later-stage funding. They want to wait till the exit. They’re okay with exiting as long as they get a good multiple even at Series A. This is a good segue into the question I have about what your impression is of unicorn mania. As a pre-seed investor, you could get buried under later stage liquidation preferences.

How do you protect yourself? If you have a winner in your portfolio and it starts to get big valuations and then those valuations come with terms that are not attractive, that’s where the early stage investors get screwed.

Laurel Touby: I agree, which is why it’s important that you stay close to the founders and be helpful to them so that you’re given preferential treatment or at least equal treatment as they raise more capital. You just have to offer up your pro rata rates to your LPs and make money for your investors.

These are good problems to have as we invest in companies that succeed. We’re going to make the decisions along the way that will determine where we go. I’m also not averse to creating SPVs to invest in the pro rata of these companies.

This segment is part 2 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Laurel Touby of Supernode Ventures
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