1Mby1M Virtual Accelerator Investor Forum: With Venktesh Shukla, General Partner at Monta Vista Capital (Part 4)

Sramana Mitra: My next question is something that we touched upon a little bit when we spoke some time ago. In the fund strategy, one of the things we’re seeing is that there is a class of funds that is still focused on finding unicorns.

They are looking for the very large billion-dollar opportunities, but there are thousands of micro-VCs out there right now that are working in the mode where they will do the early stage and early exit at a sub-$50 million range. Some of them are doing it in two to three years and then selling their stakes into the latter rounds.

How has your thinking evolved on that? Are you still focused purely on unicorns?

Venktesh Shukla: In the first fund, two of the 20 companies that we invested in are already unicorns. A third one is one its way. I’m keeping my fingers crossed. I think there will be a fourth unicorn also in the fund. Somebody told me that the best fund in the history of venture capital, Sequoia, has a 5% hit rate.

We are already at about 15% and may go to 20%. We have done very well. Having said that, that’s not how we look at it at all. Our approach is to see if there’s a founder-market fit. Our approach is to look at how unique the founder’s insight is and whether the market is really big or not.

Investing in small markets and betting on small outcomes is not any less risky than betting on big markets and big ambitions. There are so many things that could go wrong with startups that the risk involved in a small outcome startup is not that much different. The only exception I have found is those markets which are not really big, but there is a massive barrier to entry because of technology.

For instance, the semiconductor space. The domain knowledge is such a high premium that if someone has solved a very tough problem that even if the market is small, the probability of your getting a decent exit is very high. I would make an exception for those kinds of things.

If someone comes in and says, “I’m doing this, this, and this.” They’ll apply for $30 million. That’s not something that excites us because there are a lot of things that could go wrong in a startup. If we are taking a risk on a startup, you don’t have to limit it by the size of the potential market.

Sramana Mitra: I’m going to switch my question to a particular trend that we are following very closely, which is the PaaS trend. If you look at Salesforce.com, they have done a superb job of not just building a whole CRM portfolio of products; they’ve also built a great platform on which a lot of great companies have been built. They have acquired some of them. Some of them have gone public.

One of my favorite companies is Veeva. They spent $4 million and then they raised more money, but they didn’t use it. Today, it’s this multi-billion dollar company. There are now hundreds of great SaaS companies in different domains that have achieved a certain amount of scale.

Many of them are public. Many of them are going public right now. There’s a very large percentage that is in the $50 million ARR and growing. Many of these have the ability to move from SaaS to PaaS within their general domain.

What are you seeing in the earlier stages? Are SaaS companies starting to think PaaS from the get go? I think the really big companies are going to be built in this model going forward.

Venktesh Shukla: You’re right. Not every SaaS company can be PaaS. This deserves a separate long discussion. As you said, it’s very hard for a startup to start as a platform. No one is going to bet on you.

We have a company that now has about 8 or 10 customers. Those customers bring third-party vendors onto their platform. If they cannot find those, they’re building that functionality on top of their platform which is not core to their SaaS offering.

First, you get a customer committed to your service. Then you say, “I noticed that you’re dealing with third-party vendors. Why don’t you just do it through this platform?” That’s where the journey starts. It’s very exciting. It takes a long, long time.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Venktesh Shukla, General Partner at Monta Vista Capital
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