1Mby1M Virtual Accelerator Investor Forum: With Rajeev Madhavan of Clear Ventures (Part 5)

Sramana Mitra: That point that you made about seed capital being abundant and seed funding being abundant, and Series A becoming an issue is huge. The numbers are 50,000 to 70,000 seed financing a year, and Series A is only about 1,500. There is a huge drop off that is happening. We don’t really have a great answer on how to cross that gap.

You need to show certain levels of validation. The Series A guys are looking for a lot of different metrics which are not necessarily being tackled by the companies who have raised just seed money. It’s been a very tricky environment. As you pointed out, there are 500 to 600 micro-VCs in the market right now who are funding tons and tons of companies at the seed stage.

The game has changed. Seed used to be the harder round to get.

Rajeev Madhavan: Yes, there is too much money in seed. One of the things we’re proud of is we have done about 65 companies. Out of that, all of them have gone on to raise Series A and B. We take great pride in picking companies. We spend a lot of time with companies to making sure that those metrics are thought about right from day one.

Your valuation may be low if your metrics are only XYZ but it’s better to get that rather than not having any clear metrics that you want to succeed at. That confidence is what you need to show. That’s the challenge. A lot of the early stage people have not run companies where you have to hit the numbers. Nowadays if you do the seed investment, you need to think about it at that stage.

Sramana Mitra: Last question, what is your TAM preference? I’ll tell you where I’m coming from. We are in 2018. There is a lot of stuff that has been built already. There are a lot of niche opportunities but there aren’t as many multi-billion dollar opportunities lying around.

I talk to a lot of investors including a lot of these micro-VCs. A lot of people say they want to do unicorn valuation so that means they want multi-billion opportunities. There are $200 million to $300 million opportunities and in some cases, maybe $100 million opportunities. If you build a robust company with very big market share, that is also an opportunity for making a lot of money. Are these opportunities that you would consider?

Rajeev Madhavan: While we may look at them, the chances are low. I believe that the number one thing that helps an entrepreneur is the wind behind them in terms of the size of the market. If the market is big, your execution can have one or two hiccups and you will still succeed. If your market is small, the chances of that is very low because you’ve got one path of execution. Market is almost as important, if not more important sometimes, than the team.

Sramana Mitra: I actually agree with that. There are different points of views in Silicon Valley on that topic. I agree with you. I think market is more important.

Rajeev Madhavan: For me, number one is market. Number two is team. It’s a very tight call. Everything else is immaterial. When we told you we take it at very early stage, we are looking at the TAM. It’s important to realize that the market makes a lot of difference. A $100 million market is very difficult to build a company on because you make two execution mistakes and you’re fried.

The technology has to be complex enough that it’s not easy for 10 guys sitting in some other place to replicate it. You need to have that one or two years of delta. If you can’t, it becomes very difficult especially in enterprise companies. In consumer, being able to capture eyeballs and customers does make a lot of difference. But there, you need a lot more capital. If you look at companies that have built marketplaces, they have had to take a lot of money.

The metrics still require you to get down to a certain set of number of users and make sure that you’re tracking that. It’s very important to have market behind us. In our particular case, we look for TAM as almost a number one priority. We work with the founders to help define that as well as help in saying, “Maybe this technology has better use for this.”

Sramana Mitra: Excellent conversation. Thank you for your time.

This segment is part 5 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Rajeev Madhavan of Clear Ventures
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