1Mby1M Virtual Accelerator Investor Forum: With Clint Chao of Moment Ventures (Part 5)

Sramana Mitra: How do you process the current investment climate where capital is moving further and further upstream? How does a seed investor mitigate the Series A gap?

Clint Chao: It’s a great question. It’s clear that your traditional Series A investors have raised the hurdle, if you will, on what qualifies as a viable investment.

Sramana Mitra: Today’s Series A is a Series B or C from 10 years ago.

Clint Chao: We try not to get caught up in the verbiage of what letter it is. The fact of the matter is these companies are being asked to do more with less. Before you’re ready to really scale your business, you need to have the kind of performance that really warrants that kind of attention. The hurdle is going up.

Since we’re focused primarily on B2B and most of our companies are focused on building a product or service that is sold to other businesses, there’s a revenue metric and implication even on day one. How easy is it to sell? What are the large influencing customers in your target industry doing?

There’s one interesting byproduct of what’s going on. We’re seeing companies move into industries that have not had traditional concentration of tech startups. When companies start striking a nerve in those industries, we start seeing an interesting outreach from some of the large incumbents in those industries. That’s a good sign that you’re on to something. I think it’s very interesting to see how entrepreneurs react to those kinds of actions.

Most exits for venture-backed companies are going to come via M&A. I do believe that the M&A landscape is opening up to a different category of potential buyers. They know technology is going to make an impact in their industry. They’re not sure how that’s going to happen but there is a lot of intrigue out there.

We try to help our entrepreneurs have a constant gauge on their progress in those industries. That can tell you a lot about how the company will eventually grow and put themselves in position to raise follow-on rounds of capital. Entrepreneurs need to be capital efficient. They need to be very careful.

Sramana Mitra: This is the question that I was going to ask you. We are in 2018. Lots of stuff have already been built. Nowadays, there aren’t so many wide open opportunities for billion-dollar companies, but there are many niche opportunities. The vertical point that you’re making is absolutely on dot.

There’s so many verticals and workflows that can produce interesting companies. Some of these businesses need to be built for small amounts of capital and sold for under $50 million, which is where bulk of the exits happen. Do you have appetite for these types of investments?

Clint Chao: First of all, I whole-heartedly agree that companies that are going after these opportunities need to raise small amounts of capital and stay capital-efficient while they’re proving out their business. However, I believe that if they’re starting to show an inflection in their business, there’s no escaping the fact that they will likely raise a good bit more money from the market. Maybe capital efficient upfront. When you’re really trying to scale the business, it would be wise to consider raising larger amounts of money to continue execution.

Sramana Mitra: Maybe not. Some of these are getting acquired early also. If you can build a company for less than $5 million and get acquired for $40 million, that’s not a bad equation.

Clint Chao: Absolutely. I do believe that all entrepreneurs on day one feel that they’re going after billion-dollar opportunities. The reality is, as they start building their business, the market is slow to embrace their technology. Maybe customers have other alternatives. Maybe the team is unable to execute their plan. In those cases, where it could potentially be difficult climbing and getting follow-on together and an opportunity emerges where they can exit before they raise large amounts of money, I think that’s a very viable strategy.

This segment is part 5 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Clint Chao of Moment Ventures
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