1Mby1M Virtual Accelerator Investor Forum: With Shripati Acharya of Prime Venture Partners (Part 5)

Shripati Acharya: I was talking to an entrepreneur yesterday. He was talking about why they turned down a chance to raise a lot of money.

One is that the structure of the company changes if you raise $10 million instead of $3 million. Sometimes, there are opportunities like that because we have oversubscribed rounds. There is a lot of interest in a particular area.  The cost structure changes instantly.

The second is, it reduces the innovation. Let’s take a B2B case. When you start in enterprise SaaS, when you overfund the company, the first thing you’ll do is hire a sales team. Once you do that, the cost structure shoots through the roof. You can spend a lot of money before product-market fit very quickly.

Sramana Mitra: Sales people cannot achieve product-market fit. It has to be engineered by the entrepreneurs with very deep conversations with a select group of customers. Bringing sales people early is completely useless.

Shripati Acharya: Absolutely. We think of capitalizing companies with 24 months’ runway. The first 6 to 12 months need to be very frugal until you get product-market fit.

Entrepreneurs ask, “How do I know whether there is product-market fit?” You really do know when there is product-market fit. You just start running out of people. You have that energy in the company because customers are constantly asking.

Sramana Mitra: The philosophy that you’ve described earlier of being willing to do deals that are almost napkin-stage deals, you don’t see as many oversubscribed rounds because there are not many investors who are willing to do that. That almost shields you from that problem.

Shripati Acharya: It does. I should clarify that not all our investments are in that lane. Many times, they may have an initial indication of product-market fit. What we have found is that in many cases, it requires a lot of understanding and discussion to figure out what this is about.

That requires patience. We took 10x to understand what’s going on. In one sense, the entrepreneurs end up probing the VCs as much as VCs are probing the entrepreneur. They are trying to understand each other. The entrepreneur says, “We can’t really get our point across to the folks we are talking to.”

That could be for any number of reasons. Sometimes, the entrepreneurs have a general idea. They need to refine it. I feel that being wrong quickly is a lot better. If you don’t have your hypothesis clear, it’s very easy to meander around.

Sramana Mitra: The other thing that makes it difficult for entrepreneurs who are thinking really contrarian is that the market behaves differently. Every signal is against you. I have taken a contrarian position with One Million by One Million. There’s a lot of people who hate my guts for doing that.

Shripati Acharya: That’s why the conviction of the entrepreneur is really important.

Sramana Mitra: Great conversation. Thank you for your time.

This segment is part 5 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Shripati Acharya of Prime Venture Partners
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