1Mby1M Virtual Accelerator Investor Forum: With William Hsu of Mucker Capital (Part 4)

Sramana Mitra: Can you put some quantitative parameters around that $200 million exit? For a good, healthy $200 million exit where everybody makes money, what is the optimum amount of capital invested? What kind of revenue levels do you target?

William Hsu: Depends on the category. For a SaaS or an enterprise software solution, typically, anywhere from $20 million to $40 million will be good enough to get anywhere from $100 million to even $300 million in valuation. If it’s an e-commerce business, it probably has to get to closer to $100 million in revenue. Software businesses are a lot more capital efficient.

If you’re looking for an opportunity that is sub-unicorn in size, try to find businesses without an inventory or any cost of goods. To build a $100 million e-commerce business, you probably need to have a balance sheet of, at least, $25 million to support the inventory. At a software company, you can get to $20 million in annual revenue with five employees.

Sramana Mitra: Software companies can be very capital efficient. What is your assessment about the optimal amount of capital that you put into a software company to get to $20 million in revenue?

William Hsu: You probably need anywhere from a million to $5 million. That depends on your price point and your sales cycle. If you can sell a high price point product and close a sale within 60 days, you can generate cash flow fast enough without needing capital. We have a company called Service Titan. They raised about $500,000. That was enough to get them to $10 million in annual revenue.

Sramana Mitra: My thesis on the smaller opportunities is that you develop a product. A product maybe has $200 million TAM. You get product-market fit. You get to $10 million in revenue and do the rest of the scaling through somebody else’s channel who’s going to acquire you as a strategic acquisition and can reap the benefits of the rest of the TAM as opposed to you investing in the full channel development to get to a much larger scale. Developing a channel is a very expensive process.

William Hsu: There are software-only private equity shops out there now that specialize in acquiring companies in the $100 million to $200 million range, and putting them together with other companies to create unicorns out of them. Oftentimes, they will have a decently diverse portfolio of products and type of customers.

Sramana Mitra: Even larger companies are looking for stuff like that.

William Hsu: Yes. There’s going to be more and more opportunities of VCs selling their companies to a private equity shop. In addition to strategic, there will be financial buyers too.

Sramana Mitra: Right. It’s a perfectly fine investment opportunity. The point that I wanted to make with you is that please don’t be so swayed by this whole unicorn phenomenon and that VCs would only look at unicorns. Right now, the industry has changed. In the early stages, there are a good 500 to 600 micro-VCs or small funds that are operating with the unicorn philosophy.

Some of these small funds are still looking to participate in the unicorn phenomenon. I am now seeing firms emerging that are willing to look at different models that are more contemporary and more relevant to what’s happening in the current universe. I’m very glad to hear that you are amenable and open to these kinds of opportunities.

William Hsu: That is usually an amenable strategy for VCs in South California. It’s not easy to raise $50 million outside of the Bay Area. The company has to find a way to be efficient.

Sramana Mitra: Great. Thank you for sharing your perspective.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With William Hsu of Mucker Capital
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