1Mby1M Virtual Accelerator Investor Forum: With Ira Weiss of Hyde Park Venture Partners (Part 3)

Sramana Mitra: Let me ask you the TAM question. We are in January 2018. Lots of stuff have already been built. Nowadays, there aren’t as many wide open opportunities to build these multi-billion dollar companies. It’s not like very corner of the enterprise software market is full of billion-dollar opportunities. There are lots of niche opportunities.

Some of these have lower TAMs. Some of these businesses need to be built for small amounts of capital – $2 million sold for $15 million. In some cases, $250,000 and sold for $5 million to $10 million. What is your perspective on these kinds of opportunities? Is this something you look at?

Ira Weiss: I guess we are fortunate that we have a fund size that allow us to look at investments that have a smaller TAM. $75 million to $100 million TAM is probably too small for us. You could build an amazing business in a market that has $75 million TAM. You just have to make sure to do it cost-effectively.

There’re lots of those opportunities out there. I see them all day long. We need to make decisions about how big the TAM needs to be and how attractive the market is, but I think there’s a lot of opportunities out there to build businesses even in those smaller markets.

Sramana Mitra: But it’s not a market that you go after. However you’re saying that you do go after smaller TAM opportunities. What would be a reasonable cut off?

Ira Weiss: It would probably be $200 million. Here’s my caveat about TAM. Sometimes, the original TAM seems relatively small. Sometimes, that’s just a beachhead into a larger market. We’re actually about to make an investment into a company where the TAM is about $80 million.

If it works and they get traction, there is a wider market. There is no evidence yet that their product works in the wider market. We believe in the entrepreneur and we believe that it’s a product that can also address the wider market. There are some cases where your initial TAM can be quite small. That may be a good way to start to get a very dedicated group of users.

Sramana Mitra: If you have a very big market, there are lots of competitors vying for that market share. In the niche market, there are very few players and you could have 70% market share of a relatively smaller market.

Ira Weiss: I agree completely.

Sramana Mitra: How do you process the current investment climate where capital is moving further and further upstream? How does a seed investor or an entrepreneur mitigate the Series A gap?

Ira Weiss: I would also rename Series A gap. The seed rounds, particularly on the coast, seemed to have gotten larger. They’re almost close to what a Series A would have been. Our experience is, the really good companies are able to get funding at Series A if the traction is there and the team is there. The best companies are able to get funding in the next round. Especially if you’re a multi-stage fund that invests in different stages, you want to be investing at the Series A because it’s easier to get bigger ownership percentages early on.

Sramana Mitra: But they can’t. If you have a $2 billion fund, you can’t go about putting in $1 million or $2 million. The number of partners is limited, so they have limited bandwidth.

Ira Weiss: That, I agree.

Sramana Mitra: As a result, the Series A has become larger. If it’s a $4 million to $6 million Series A, then yes. The requirement for a $4 million Series A is often a $2 million annual revenue run rate.

Ira Weiss: There are a lot of rounds of financing to get to that point in small dribs and drabs. When I look at the data, there’s a lot of Series A that’s in the $8 million to $12 million range. In the MidWest, it could be a $4 million round. On the coast, it’s $8 million to $12 million. There are a lot of early stage funds that do Series A and always want to start with Series A.

There are a bunch of multi-stage funds that also want to be able to invest at Series A whenever they can because they get larger ownership stakes. I’m not as close to the data on it. We certainly find that it can be hard to get a Series A done and even harder to get a Series B done. For the best companies, they’re always able to get funding.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Ira Weiss of Hyde Park Venture Partners
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