1Mby1M Virtual Accelerator Investor Forum: With Yipeng Zhao of Embark Ventures (Part 4)

Sramana Mitra: What do you think of the Series A gap? There are hundred thousand seed investments and 1,200 to 1,500 venture investments. How do you process that?

Yipeng Zhao: Seed and Series A is always a hard gap. By nature of the business, you will always say most companies die after seed. I don’t think that’s because of the structure of the business. It’s just because of the nature of the business.

As I said, venture startup is a high-risk business. Most of the time, companies die quickly. The gap between seed and Series A is not really an issue. Seed is more of a testing phase. Series A is more serious. If a company is not fundable at Series A, there have to be some consequences.

Sramana Mitra: I have a completely different perspective on this. I don’t have a venture capital perspective. I take the perspective of the entrepreneur. It’s not like that these companies need to die at all. They need to be built as non venture-funded companies with maybe a little bit of angel-funding or seed-funding but largely bootstrapped companies. You can build very nice businesses.

The venture capital industry has a very arrogant perspective that all these companies that don’t fit the venture model are bad companies. They’re not bad companies.

Yipeng Zhao: I’m not saying that. Since the context is Series A and seed funding, if the company decides to raise from venture at the seed stage, they have to understand the consequences of venture-backed companies.

Sramana Mitra: That is correct. The problem with the industry is that all entrepreneurs think that they should all raise venture capital. That’s a flawed assumption.

Yipeng Zhao: That’s actually one of my biggest advice to most companies. If you are not a high-growth company, just don’t take money from venture capital. The venture funding doesn’t help you. There are so many other resources that can make you a great company. If a company decides to take money from venture capital at seed, they have to know the consequences.

Sramana Mitra: If you take venture capital, you’re going to need to go to a hundred million dollars in five to seven years.

Yipeng Zhao: Yes. We are very honest. We tell the entrepreneurs the truth. For venture capital, it’s better for the company to die faster rather than just being a living zombie for venture-backed businesses. We have a very short period of time to give back to our LPs. You can always feed the company money to make it work for another year. For the entrepreneur, they can have better things to do other than working for a company that has no chance for hyper growth. It’s unfair to the entrepreneur just because of the weird structure of venture capital.

Sramana Mitra: Part of the problem is the industry is full of bad VCs who make bad investments. As a result, the entrepreneur gets caught in this trying to fit a square peg in a round hole situation, which is completely unhealthy and completely unproductive.

Yipeng Zhao: It’s very easy to get seed funding now. You can easily get seed funding even if you’re not venture-fundable. It could be a very good business, but it can’t be hyper growth. These guys raise for venture capital. It’s actually bad for them and not bad for venture capital. They could be a very amazing business in two years but since you’re taking money from venture, the VC is pushing them to spend the money to go hyper growth. They end up in this bad circle.

Sramana Mitra: Good perspective. I harp on these points. Thank you for reinforcing those points.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Yipeng Zhao of Embark Ventures
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