1Mby1M Virtual Accelerator Investor Forum: With John Frankel of ff Venture Capital (Part 4)

Sramana Mitra: I’m going to ask you a few trend questions. How do you process the current investment climate where capital is moving further and further upstream? How does a seed investor mitigate the Series A gap? The number of seed investments that are happening have gone up but the Series A number has stayed steady. How do you parse this trend?

John Frankel: There’re a lot of data points out there. It’s easy to string them together into a story. The thing to understand is once a venture capitalist invests, probably two-thirds of their portfolio goes nowhere. One third gets written off. One third, they get their capital back. The last third is where the returns are.

A third of the third is where you’re going to make a difference with regard to your portfolio returns. That’s after a VC invests. If you take 10,000 deals, they may invest in a hundred. Out of that hundred, only 10 are going to move their portfolio. Nine of the 10 are probably going to be sold. Only one goes public. If you think about that, there’s a seed gap, A gap, and B gap. There’s a winnowing down at every single stage.

At the moment, there’s a lot of talk about these 200 seed funds in New York and the 600 new venture capital funds that didn’t exist a couple of years ago while raising capital. You go and talk to people in the angel networks, they say angels are a little bit less engaged than they used to be. You look at something like AngelList which used to allow anybody to post any deal on the platform. Now they’ve become very selective.

Ultimately, the good companies work their way through all of these stages and do incredibly well. What’s most important for an entrepreneur to do is to find a firm, angel, or advisor who really believes in them and wants to back them up not just in good times but in bad times as well. If you have someone there really helping you out in the bad times, it increases your chance of doing well.

With the current environment, good companies are raising money at really good valuations. The companies that haven’t been able to find product market fit are not getting funded. The ones in between need to work out which direction they want to go.

Sramana Mitra: I think the determining factor is that hyper growth is not a natural state. Venture capital requires hyper growth. Your whole business premise is based on these hyper growth companies. Maybe an entrepreneur finds product market fit but cannot find that heavy acceleration. That means that they’re going to be building smaller companies. They have to build these smaller companies in a capital-efficient way and exit quickly with very small amounts of capital.

Tons of things have already been built. The internet is more than 20 years old. There’s a ton of stuff out there that have already been built, but there are a lot of niche opportunities which need to be built not in the traditional venture capital model. I think the fallacy of our industry is that we are trying to package all of these into the venture capital box. That is unviable and unsustainable.

John Frankel: I totally agree. There’s only a subset of businesses that should take outside money. A subset of those should take venture money. There are many great businesses where the company can grow substantially and not take money from outside investors and do great.

Sramana Mitra: That level of success is an outlier.

John Frankel: All successes are outliers.

Sramana Mitra: If a company does $5 million to $20 million not in a hyper fast scale, that is still a successful business.

John Frankel: Absolutely. I don’t disagree at all.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With John Frankel of ff Venture Capital
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