1Mby1M Virtual Accelerator Investor Forum: With William Hsu of Mucker Capital (Part 3)

Sramana Mitra: Our philosophy in One Million by One Million is entrepreneurship equals customers, revenues, and profits. Financing and exit are optional. We make sure that customers are willing to pay for whatever it is that you’re selling. Whatever it is that you’re doing, that is the fundamental belief system of our program.

William Hsu: It’s the fundamental belief of any capitalist system.

Sramana Mitra: It should be. In Silicon Valley, it is not. Silicon Valley operates on venture welfare.

William Hsu: The funny thing is if you’re able to prove product-market fit and you’re raising money simply for distribution, we see those type of stories a lot too. If you look at some of our portfolio companies, a lot of them are based outside of the Valley but at some point, they raised money from Silicon Valley.

They are able to do not because the founders go to the same cocktail parties as the VC’s, but because it’s a great business. The customers love it. The users are retaining. The money that’s being raised is going to be invested in scale rather than trying to figure out product-market fit or some sort of employee welfare.

Sramana Mitra: Switching gears again, 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?

William Hsu: We are somewhat of a contrarian in the VC world. The way they make more money is to raise a bigger and larger fund. When you do that, you force them to invest in later stage companies. If I’m simply thinking about my checkbook, that’s obviously what I should be doing.

My partner and I are both entrepreneurs first and VC second. We started Mucker just like any other company. We like this early stage. We like the stage we’re in. We are raising bigger funds but we’re staying as early as possible.

As other VCs move upstream, we’re going as downstream as we can. By raising a bigger fund, we are able to continue to invest in our company in consecutive rounds for ourself. That means that we can put in $150,000 on the first check, another $100,000 twelve months later, and another $500,000 six months after. We can support our companies longer and help them bridge the gap to Series A.

Sramana Mitra: You are basically planing to do it all yourselves.

William Hsu: Correct. We do that not out of welfare. We set very tough milestones for our companies. If they hit their milestone, they can either go out and raise money from someone else or they can take our money. If they don’t hit their milestone, no amount of begging will help them get money from us. We don’t want our follow-on investment to be an emotional decision. It is a purely quantitative decision. It should be a business exercise rather than an emotional exercise.

Sramana Mitra: How do you parse unicorn mania? As a seed investor, you could get buried under later-stage liquidation preferences. How do you protect yourself?

William Hsu: We have a large enough fund now to continue to take pro rata and continue to maintain our ownership, and continue to have preference on the capital stack. Oftentimes, because we come in so early, we can make 100x before the company becomes a unicorn. We’ll think about exiting an investment even before the company has liquidity. When they’re raising $100 million rounds, it’s time for us to think about exiting into those rounds rather than holding on for another two to three years.

Sramana Mitra: That is the common wisdom that is emerging in the early stage small funds. If you are going to have to go three years before the large funding starts, it’s okay. It’s a good idea to start exiting well before the actual exit occurs. In a way, the early stage and the late stage investment cycles in the venture capital business are splitting up. I think the early stages are exiting into the late stages. I think this will continue to be a major trend in the investment cycles.

William Hsu: Twenty years ago, companies were going public at $600 million in valuation. VCs were exiting into the IPO round. Today, companies are a lot larger. It’s case by case, but early-stage VCs can make good money and support great entrepreneurs by selling into rounds.

Sramana Mitra: At the beginning of 2018, we are more than 20 years into the commercial internet. We are more than 10 years into the history of the smartphones. A lot of stuff have been built already. Nowadays, there aren’t so many wide open opportunities out there to build very large companies, but there are very many niche opportunities.

Some of these need to be built with small amounts of capital. Let’s say $1 million to $2 million and exited for $10 million to $15 million. Even smaller investments – $500,000 and sell for $5 million. Are these types of opportunities on your radar? Is this something you have appetite for?

William Hsu: Yes and no. I don’t need to find unicorns but I would like to find companies that could be eventually worth $200 million. When it’s $15 million to $30 million, it’s probably too small for us. $200 million is perfectly fine as long as the company is capital-efficient and they can build their business with just our capital and grow organically from cash flow.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With William Hsu of Mucker Capital
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