1Mby1M Virtual Accelerator Investor Forum: With Yipeng Zhao of Embark Ventures (Part 3)

Sramana Mitra: When you say you are comfortable investing $250,000 to $2 million, what do you want to see in terms of validation to be willing to invest?

Yipeng Zhao: A lot of the time, it depends on the stage of the company. We can do anywhere from idea stage, which we call pre-seed. This is basically a smart entrepreneur that has an idea. We are highly focused on deep tech stuff. They have great engineer work they developed but they don’t really have a prototype.

We can actually go in that early, but that will be for a smaller check and lower valuation. The validation that we’re looking at in that stage will be more for the team. The team has to be amazing for us to make an investment. We also have to understand the future produc, future value proposition, and product development pipeline. We typically would want a company to have a prototype or proof of concept type of deal.

After this round of financing, hopefully they can have one paying customer. To validate that idea, we normally want to see the prototype of proof of concept and revenue. Revenue is not an absolute requirement. We also do a little bit of the smaller Series A deals.

Sramana Mitra: Talk to me about TAM. In the Bay Area, we see a lot companies still chasing unicorns. Are you chasing unicorns or are you open to investing in companies that are working on smaller TAMs but could be very compelling? That will be $200 million TAM but has to be done differently as a capital efficient venture.

Yipeng Zhao: Different investors have different opinions. We definitely believe the unicorn type of company as a venture investor. Our definition of a unicorn is a little bit different than Sequoia. The company in our portfolio doesn’t have to be billion dollars. A couple of million dollar exit could be good for us.

We definitely want the company to have the potential to become a unicorn. We don’t want to invest in a small-exit type of company. One reason is because we believe that venture model is built on high-risk, high-return type of company. You have to have a very big potential in order to justify the risk. Venture capital is really one of the most risky assets you can have in your portfolio.

Sramana Mitra: I think the issue is that the market is so flooded with micro-VCs right now. Just in the last five years, there were 700 micro-VC funds. If everybody is looking for unicorns, it’s just mathematically unviable.

Yipeng Zhao: I agree. That’s why I said that the definition of a unicorn for us is different than the definition of the unicorn people generally think about. For us, the unicorn could be an exit with a couple of a hundred million dollars whereas that’s not a unicorn for Sequoia.

Sramana Mitra: But that is not the definition of a unicorn. A unicorn is defined as a billion-dollar market cap company. What you’re looking for is a 10x return which is not a unicorn necessarily. You can get a 10x return on a company that has a much smaller exit.

Yipeng Zhao: Yes, my point is that we are still looking for unicorns. We don’t have to have a unicorn to make the fund a good fund but we have to look for unicorns.

Sramana Mitra: There are lots of funds right now that are looking for smaller exits and smaller opportunities to not compete in that same pool where all the unicorn seekers are competing.

Yipeng Zhao: Yes. That’s also a very good value proposition.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Yipeng Zhao of Embark Ventures
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