1Mby1M Virtual Accelerator Investor Forum: With Rob Schultz of Serra Ventures (Part 4)

Sramana Mitra: I have two questions to narrow down on your style of investment. First and foremost, it sounds like you invest across multiple sectors. You do B2B SaaS and you do medical. Do you also do B2C?

Rob Schultz: No. We tend to stay away from B2C opportunities. We don’t understand it that well. They tend to be more capital intensive to do well. It’s not to say that we wouldn’t. We look for differentiation.

Sramana Mitra: What about unicorns? Is the thinking that you are acting as seeders into follow-on rounds and you are trying to become billion-dollar valuation companies? Is that the trajectory that you’re interested in? Are you also interested in what I see as a very robust niche set of opportunities where the TAMs are not billion-dollar TAMs necessarily?

They are more of $100 million to $300 million TAMs, but you can build very compelling companies in those niches and do it in a capital-efficient manner and pursue earlier exit. Which of these, or both, are your sweet spots?

Rob Schultz: That’s  a good way to frame the question. If we had to pick one of those, it would be in the latter. We don’t play in the unicorn game of the Valley. We built our venture model to not necessarily need to achieve those types of exits. Of course, we like opportunities to emerge like that but we haven’t built the structure and return characteristics to need unicorns.

Being a smaller fund, we tend to align more with the more capital-efficient businesses. It’s cliché but it’s more of an attitude of the entrepreneur and how they want to build their business and how capital-efficient they can be. If you look at the average exit size, it’s around $60 million for a software company. We don’t think that should be a failure for an entrepreneur. We look for opportunities where we can align well with entrepreneurs. We don’t want to choke the business with undercapitalizing it.

Sramana Mitra: But there is a ceiling to how much money you should be putting into a company if the end game is a $60 million exit.

Rob Schultz: Yes.

Sramana Mitra: We’ve talked to funds everywhere. I’ve had this conversation with a number of smaller funds who have your perspective of doing the more capital-efficient, earlier exit strategy. There is a fund out of Oregon. There is a fund out of Omaha, Nebraska that does that and many others.

Other than geography, you also have that as a differentiator. This is something that mostly investors in Silicon Valley don’t like to do. There’s a set of companies in Silicon Valley that have that characteristic, but they have a hard time finding funding in Silicon Valley because of that belief system that everything needs to be a unicorn.

Rob Schultz: If you’ve got a half a billion dollar fund, you need to put capital to work. For those funds, that’s the lends that they’re looking at, which may or may not be in the best interest of the entrepreneur.

Sramana Mitra: Not just the larger funds. It’s also a mindset. Even a $30 million fund is looking to be a seeder to a unicorn. It’s not as straightforward as just the larger funds are looking for unicorns. They have to look for unicorns because they’re structurally framed to look for unicorns.

Even the small funds are looking for unicorns. There are lots of them. Right now, the ecosystem has 700 plus micro-VCs. That’s a lot of companies looking for unicorns.

Rob Schultz: Being in the Midwest, we’re insulated from a lot of that noise. We look, first and foremost, to fund great entrepreneurs solving tough problems and to build great businesses. That’s what we look for.

Sramana Mitra: Thank you for that primer into Serra Ventures. Thank you for your time.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Rob Schultz of Serra Ventures
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