1Mby1M Virtual Accelerator Investor Forum: With Gary Little of Canvas Ventures (Part 4)

Sramana Mitra: What do you think of unicorn mania? Are you chasing unicorns? What’s your analysis of the desire for unicorns?

Gary Little: We don’t chase unicorns. You start with things that look like mules and we try to grow them to a unicorn. When we select companies, we try to find companies that have the opportunity to be billion-dollar companies. We don’t chase companies that are already at the multi-hundred million valuation.

Sramana Mitra: The real question in that is what kind of TAM is interesting for you? Given where we are in the history of the startup industry, there are billion-dollar opportunities, but there are also many opportunities that are $500 million TAM which are better suited for acquisition exits.

Gary Little: I understand your question now. From a portfolio standpoint, if you have a $300 million fund like we do, we like each individual company to have the opportunity to return the entire fund. The rest of portfolio can try to double or triple. It’s not an easy task. You need to have that one company in the portfolio that can return the entire fund for the venture economics to work. Not all of them are going to get there. Therefore, some are going to exit at that $3 million to $5 million. Some are going to be zeros.

As a venture fund, you need to return two to three times the investment to the LPs if you want to continue to raise money over the next two decades. That’s the way it works. Lower outcomes are fine, but if you start out saying, “This could be a $300 million company,” you reduce your opportunity of having those real unicorns that really make the portfolio return. Having said that, this is a really good place for angel money and seed money.

At that stage, there’s not enough data about the market opportunity, the product-market fit, the team and how they work together to really know whether you have a $50 million opportunity or a billion dollar opportunity. That gives the entrepreneur some flexibility before they decide to raise venture. What I mean is that for the $5 million round, they should know that venture capitals are looking for that billion-dollar plus opportunity.

Unless the entrepreneur feels that it has that opportunity and is willing to go along for a 5 to 10 year ride, maybe they should just keep raising seed and angel money so they have the flexibility to exit at a $50 million or a $100 million exit with a lot of ownership and then move on to the next opportunity that could be that billion-dollar opportunity. Some entrepreneurs can get trapped by raising money and telling a big story when they don’t necessarily have conviction themselves and when they could be spending their time on better opportunities.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Gary Little of Canvas Ventures
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