1Mby1M Virtual Accelerator Investor Forum: With Michael Smerklo of Next Coast Ventures (Part 2)

Sramana Mitra: What is the current fund size? $50 million is a small fund size to do $5 million to $10 million checks.

Michael Smerklo: We ended up being way oversubscribed for fund one. We ended up being just under $90 million for fund one. It was twice larger than we expected. 

Sramana Mitra: To write those checks, what are you looking for? If you are doing a B2B SaaS deal, what kind of MRR or ARR metric are you looking for?

Michale Smerklo: It’s not a defined threshold. It’s more of an art than a science. I’ve listened to your podcasts. You’ve done a great job. You’re really dialing into this changing nature of the venture landscape. I bring that up as a preamble because it makes it hard to say we have a specific revenue threshold.

We want to see some indication of product-market fit. It tends to be around a million dollars in ARR but it’s not necessitated by it. We also want to see some indication of what the unit economics or margin structure would look like. I distinguish that because a lot of time, folks that look past that tend to be more in the seed area of investing. That’s not us.

We’re not your first institutional capital. We come in Series A and Series B and that’s evidenced by some degree of product-market fit and some understanding of how the business, at scale, will look from a margin structure.

Sramana Mitra: When it comes a company like Airbnb or Uber, how do you gauge those? Do you gauge with some revenue metrics? How do you determine which ones are going to go?

Michael Smerklo: I gave that example more along the lines of, what I call, emerging platforms. You dream of the new product. You introduce it to the marketplace and then the funding starts to happen.

We’re looking to understand how the customer engagement is going. There’s this joke, “Build a better mousetrap and the world will beat at your door.” That just doesn’t exist. The world is busy. It’s a complicated structure you’re operating in.

As you introduce the product, how are you seeing customer feedback? How are you responding to that customer feedback? How are you adapting and modifying your solution? How are you thinking about that at scale? 

Sramana Mitra: The noise level in the market is so high. Cutting through that noise and getting a segment of customers is really challenging. It’s really difficult. 

Michael Smerklo: When I started in technology 20 years ago, it was a very defined market. If you read any of the daily funding events, it’s everything from perfume to dog food. That is a good thing but it also makes it really crowded.

Sramana Mitra: The days when you could pay a few cents to acquire through Google Ads are gone. Customer acquisition has become very expensive. Let’s talk about some examples of what you have invested in.

In particular, what I would like to do is understand your thought process in selecting those. What is it about those companies when they came to you? Why did they speak to you enough for you to want to engage?

Michael Smerklo: We’ve invested in 25 different companies right now. All of our portfolio is on our website. For the first fund, we took about 10% of that and put it into what we call innovation. These would be smaller check sizes and more passive in nature. It was more to develop our brand.

Our core focus is Series A and Series B. We’ve done 11 of those to date. I would say that every one of those have very similar characteristics. They have a big market. They have a disruptive solution. We’ve looked at each one of them and said, “This is unique.”

All the companies in our core portfolio have the kick-ass entrepreneur. The entrepreneur must have the focus, determination, and the stick-to-itiveness to drive the business forward. The big market is one thing. There’re a lot of people going after big markets. We see that.

Where we really get excited is when you have that entrepreneur and you go, “She is just going to run through a wall.” We certainly want to make sure that they stay within ethical and legal boundaries. Just that mindset that they’re going to run through it.

We use this term ‘glass eater’ which is a term of endearment. It signifies what we’re looking for most. That’s when we get most enthusiastic.

This segment is part 2 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Michael Smerklo of Next Coast Ventures
1 2 3 4 5