1Mby1M Virtual Accelerator Investor Forum: With Alok Nandan, Founder General Partner at First Rays Venture Partners (Part 4)

Sramana Mitra: Switching the line of questioning, what are you thinking in terms of how you want to play this fund? Are you looking for unicorns? Are you looking for strategic early exits? What is the analysis?

Alok Nandan: When we come in as investors, there are two guys in a garage most of the time. It is hard to predict if any of these startups will become a unicorn. We can’t base our strategy on companies becoming unicorns. Given our fund size and the number of bets we make, even if they get acquired for $100 million or so, that is a good return for us.

Our fund strategy does not depend on companies becoming unicorns. Even if none of our companies become unicorns, we will still do fine because of our fund size and strategy. That is a conscious decision. There is another thing that I would like to help the audience understand. B2C is like a movie business where you get a hit like Facebook or Snapchat, meanwhile the rest go to zero. B2B software is not like that. There are a lot of sub-$200 million to $300 million exits.

Sramana Mitra: Most are sub-$50 million exits.

Alok Nandan: It depends. If it is strategic, then it goes from $70 million to $100 million. In cybersecurity, data, and networking, $200 million to $250 million acquisitions happen quite a lot when it is strategic. You are right that most of these are sub $200 million. That is something that is consciously in our strategy. They don’t have to rely on unicorns for us to have a return.

Sramana Mitra: What is your assessment on this question? To make money as an investor in a $50 million to $100 million exit bracket, what is the maximum amount of money that you want to put into this company? I am talking about the full amount of capital and not just your side of the check. What is the total amount of capital that you recommend?

Alok Nandan: That is a good question. Anytime a company raises more than $10 million in its lifetime, it becomes hard to get an exit of $50 million to $100 million. Any investor that comes in with whatever check size in that $10 million range would want at least a 5x to 10x. If the going-in assumption is that you are going to get a $50 million to $100 million exit, then you shouldn’t raise more than $7 million to $8 million in the lifetime of the company.

The lesser, the better; but obviously less is more challenging because you can’t execute on stuff. I would say the optimal amount is raising $4 million to $5 million and get your product in the market, get to customers, get to $1 million in ARR. If you are a strategic fit for somebody, then they will buy you. If that is the entrepreneur’s goal, then I think that it is a sound strategy.

Sramana Mitra: There are problems out there that are not necessarily large problems, but they still need to be solved. This is not a bad strategy. In deciding what the right strategy is for entrepreneurs which include fundraising and flash exits. We also take into consideration that it is okay to play a different game.

Alok Nandan: Absolutely. This is also education for entrepreneurs. A lot of first-time entrepreneurs don’t even ask a VC what their fund size is. That is an absolute must know. There is a saying in VC land, “If you tell me your fund size, I will tell you your strategy.” The fund size is a strategy of the VC fund. If I am an entrepreneur and I am talking to somebody who has a $200 million fund, they will look at you differently compared to a VC that has a $20 million fund.

Sramana Mitra: We stress investor-entrepreneur fit a lot. Fund size is a consideration that we take into account in deciding. We talk to investors all the time. Some investors with smaller fund sizes exit into Series A or B which is a fine strategy as well.

Alok Nandan: That is happening more and more. That is a great point. It doesn’t need to be that the company needs to sell 100% outright. There are now liquidity options both for founders to get some liquidity out.

To your point that even at the Series B stage, sometimes there are investors that are okay with selling their positions to other late-stage investors. If you as a founder thought, “Oh, I will get to the Series B. Let’s see if I can exit out.” and then you see that this is a much bigger market, then you need to get a different set of investors who can take you from $100 million to $1 billion.  

Sramana Mitra: I wish you all the best with First Rays. I am sure that we will cross paths again soon. Thank you for your time.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Alok Nandan, Founder General Partner at First Rays Venture Partners
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