1Mby1M Virtual Accelerator Investor Forum: With Rami Elkhatib of Acero Capital (Part 5)

Sramana Mitra: How do you process unicorn mania? Are you chasing unicorns?

Rami Elkhatib: No, not really. Our entry point is either the Series A or Series B. In a Series B scenario, we come in and lead a Series B only if there is a situation where a company has awesome technology but is pivoting or changing its geography. We’re coming in at early-stage valuations. For us, unicorn-type valuations are something that don’t really affect us in terms of our entry into our investment. If any of our companies grow to a point where somebody wants to invest at a unicorn valuation, we’ll welcome that opportunity.

Sramana Mitra: Part of the problem that we see in the unicorn trend is that a lot of companies are getting artificially bloated up by later-stage investors. That creates huge problems for earlier investors.

Rami Elkhatib: I absolutely agree with that. I want to be respectful of a lot of the unicorns that really have the actual value that they got funded at. To be completely real about it, a lot of those companies have inflated valuations. It creates problems from an investor perspective. Number two is, it creates problems when you overfund. You really lose the discipline. Now because you have the money, you have to use it. I’ve seen a lot of examples where management teams start to spend on areas that they don’t actually understand very well.

Sramana Mitra: Then their exit options become much more limited. If you have so much money that you have to put return on investment on, there are very few companies that will be able to acquire the companies.

Rami Elkhatib: Absolutely. Since we’re the early investors in the company, we have a lot of control in terms of how the future rounds are structured. One thing that we really focus on within our portfolio companies is capital efficiency. It feels good if people are chasing you with very big checks and high valuations. We’ve turned down checks that ended up being much larger than the company needs.

Sramana Mitra: I think that’s the right strategy for the time where we are in enterprise software. The are a lot of midsized companies that have reached critical mass. There are a ton of companies in the $50 million to $500 million range and they’re all looking to acquire. If you have capital-efficient companies, you could find excellent exits into these companies. If you bloat them up too much, those exit options go away.

Rami Elkhatib: I agree. According to the last set of data I saw, something like 80% of M&A exits happen at a valuation below $125 million. Your point is exactly right. The typical venture firm, frankly, loses money or struggles to make an investment gain on that type of deal. If you’re an investor that funded a company in a very capital-efficient way, you can make money.

Sramana Mitra: Yes, build a company for $5 million to $10 million and sell it for $100 million. Everybody makes money and it’s a great outcome.

Rami Elkhatib: I fully agree with that. We actually already had one exit. This was from our first fund. It was an extremely good outcome for us.

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

This segment is part 5 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Rami Elkhatib of Acero Capital
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