1Mby1M Virtual Accelerator Investor Forum: With Ben Mathias of Vertex Ventures (Part 5)

Sramana Mitra: We are in 2018. A lot of stuff has already been built. Relative to the amount of capital that is available in the market, there are 700 plus micro-VCs in the market right now. There is a huge number of entrepreneurs who are starting companies. We can’t expect that every single venture out of this cauldron of creative energy is going to become a billion-dollar company. It’s just not mathematically viable.

Those are rare market opportunities but there are lots of opportunities for building smaller companies. If you’re looking at $200 million TAM, there are lots of niche opportunities. There are some funds that I’ve talked to who are taking note of that and realizing that it’s not necessarily as easy for everybody to chase unicorns. They are investing in some of these companies with the caveat that they will have to seek early exit. 

Are you seeing this phenomenon in India because you said that there are a lot of companies that are getting to a million dollars ARR through their seed funding. My observation is that not all of these companies actually are playing in these billion-dollar markets. You can get to a million-dollar ARR in a $100 million TAM market. That would not really qualify for a significant Series A funding because of the TAM issue. What’s happening to this pool of companies?

Ben Mathias: The companies that reach a million dollars and don’t get Series A funded, these are cash flow positive at this point in time. They can choose to remain at that level and continue to grow. They will grow without any additional capital. You hit the nail on the head. A very good investment model that is very global is to build these companies to get to a $100 million to $200 million in valuation and then have them acquired. To get to that stage, you don’t need to look beyond Series B, which means that they don’t need to raise more than $20 million in capital.

Sramana Mitra: Or a lot less actually. The bulk of the exits happen in the sub-$50 million range. If you can build a company for very small amounts of money and sell at the sub-$50 million range, that is a decent success for a set of entrepreneurs and a set of investors as long as you control the parameters that drive such an exit successful.

Ben Mathias: I agree with you. In fact, we’ve got several companies in our portfolio where we’ve done the Series A. They’re at a point where they can be acquired for $50 million to $100 million. We know that we can sell them if we want.

Sramana Mitra: What are some examples of spaces in which you’re seeing these companies?

Ben Mathias: The enterprise companies that I’ve talked about – the IoT company, the conversational banking company. We also have recently invested in a company that is a SaaS solution for small to medium-sized hotels. They’ve got 2,000 hotel customers across the world in about a hundred countries. There have been interest from strategics to either come in or acquire the company in the future. We’ve invested in a company called SignUp, which has 10,000 SME customers in the US built out of India.

Sramana Mitra: You are playing to the assumption that not everything is going to be a unicorn but there are smaller exits possibilities as well?

Ben Mathias: Yes, our fund economics can be very successful with these $100 million to $200 million exits.

Sramana Mitra: Very good overview of your activities as well as trend analysis. Thank you for your perspective.

This segment is part 5 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Ben Mathias of Vertex Ventures
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