1Mby1M Virtual Accelerator Investor Forum: With Warren Weiss, Managing Partner at WestWave Capital (Part 2)

Sramana Mitra: You started off by saying that you’ve already had seven exits within three years. Talk to me a little bit more about the exit. What are the circumstances of these? That’s unusual for a small micro-VC to have seven exits within a three-year period.

Warren Weiss: One of the areas that we’re in is security. Larger enterprise security companies are hungry for growth. They’re looking for acquisitions that could be tuck-ins. That represents 30% IRR. We really focus on funding great engineering teams – people who know how to build world-class products.

If they don’t find product-market fit, they haven’t burned through much money. They have talented engineers, and they have customers. It’s easy for us to exit those companies. We use half of that money to recycle. It’s mostly been in the security-related field where we’ve seen these exits happen quicker. 

Sramana Mitra: Very interesting. We have the same experience. We sold a company called Adya from our portfolio to Qualys. We had exactly the same issues. They were finding customers but not quite a high-velocity product-market fit. I introduced them to Philippe and he basically acquired the company. Is everybody seeing this mode of investment in cyber security?

Warren Weiss: The companies that are focused on enterprise are seeing this kind of activity for sure. It’s very hard to build a standalone independent security company. There are hundreds of small acquisitions that can work for the entire ecosystem. Entrepreneurs have made good money at that. Customers get to see their product live out and thrive. 

Sramana Mitra: Are you comfortable talking about the economics of such deals? How much money goes in and how much money comes out?

Warren Weiss: You’ve to hit certain milestones. If you don’t get to a million dollars in ARR with a viable product and have an efficient way to market where you make 70% gross margins, you really don’t have a business that deserves to get Series A funding. In those cases, the $3 million to $5 million goes in. I would say as low as $15 million to $50 million would come out in terms of an exit, all within three years.

While they’re not large numbers, it’s the right thing to happen in the marketplace. Like I say if some of those don’t meet those requirements, it’s in their best interest to sell if they go get a Series A. Most recently, our Series A have been done with 29 follow-on rounds. You’re going to struggle if you take that money from a dilution standpoint. The Series B is where they really get weeded out. We lay that all out with the founders upfront. It’s not a surprise.

Everyone is working towards a similar goal versus not being clear about what their goals and objectives are with the funding. Venture capital money is expensive. I was a long-time entrepreneur. I always try to watch out for the founders because I want them to understand that this is very expensive money. 

This segment is part 2 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Warren Weiss, Managing Partner at WestWave Capital
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