1Mby1M Virtual Accelerator Investor Forum: With Curtis Feeny of Silicon Valley Data Capital (Part 3)

Sramana Mitra: Are you looking for billion-dollar TAM companies that are potential unicorns or are you open to the possibility of companies that are going to be solving niche problems with the kinds of technologies that you’re talking about but don’t necessarily have the billion-dollar TAM? Maybe they’re lower TAM companies and they’re going to result in smaller exits.

Curtis Feeny: One of our strategic theses is, both Jim and I believe that investing in early-stage companies with a smaller fund size gives you the opportunity to have excellent returns for your investors with $300 million to $500 million exits. We can return the fund on a $500 million investment if we do it right. That does not have to be a unicorn. What it does need is very high growth rate.

To your point of the niche market, we will look at a smaller market that may not be a billion-dollar market and see if there are characteristics in that market for explosive growth in the customers so there’s very rapid adoption of this new technology or product. Getting high growth rates can get you a very high multiple and high exit value relative to the size of our investment. We definitely are able to look at smaller deals and markets than a much bigger fund size could.

Sramana Mitra: That’s actually good. We are in 2018. There are a ton of stuff that have already been built. If everybody is looking for billion-dollar unicorns, that’s going to be hard. We now have 700 micro-VCs operating in the system. There’s a huge amount of capital chasing deals.

I would even say it’s a “too much money chasing too few deals” situation when it comes to those high-order exit opportunities. I’m happy to hear that you recognize that there is another way to play this game and with equal amounts of success.

Curtis Feeny: One way we think about it is, there is a market size, which is the TAM of all potential customers. Then there is the net market size, which is if you take out all the competing startups that are aimed at that same market, what is left? If there’re 20 VC-backed companies in and around the space, what looks like a $10 billion market might be much smaller when you get into the competition and the cost goes up.

If you’re in a $500 million to a billion dollar market that no one else has invested in with venture capital, then you might have, what I like to call, a bacteria in the bone marrow opportunity where there is no immune system to stop you from coming in and taking over that market. We often look for that market opportunity when a net market size is not much worse than a much bigger market because it doesn’t have the competitive, VC-backed players.

Sramana Mitra: In general, Silicon Valley philosophy has always been to go after those billion-dollar TAM markets. Since each of those opportunities get so many deals funded, there ends up being so much competition for each of those market spaces. What you’re saying is exactly right. Going a bit off-center gives you a much cleaner path and higher-velocity close in deals.

Curtis Feeny: It comes down to how much capital it takes you to get your market established and your revenues coming in where you can be self-funded. If there are 20 competitors, the cost to get above the noise is very high. The amount of capital required goes way up. If you hear footsteps from 20 competitors in a land grab market, you actually have to be a big fund to be able to play that game. Given that we have decided strategically to be a small fund, we are not as likely to play the food fight game.

Sramana Mitra: Other points that you want to make before we close out?

Curtis Feeny: I would just mention that we have a sister company called Silicon Valley Data Science that has a consultancy aimed at advising enterprises on their data strategies and architectures. That has a number of Ph.D.’s in data science. We share technologies with them and they share technologies and deal flow with us. We actually funded three investments that came from their teams. That is another angle that helps us get an unfair advantage.

The way both Jim and I have been involved in enterprise software companies for 20 years is, coming in early and helping the teams on their go-to market strategy. I have sat on two Fortune 250 boards. I can help companies get to almost any company that they want to access for a partnership or exit. We have a lot of late-stage capabilities for early companies.

Sramana Mitra: Excellent. Thank you for your time.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Curtis Feeny of Silicon Valley Data Capital
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