1Mby1M Virtual Accelerator Investor Forum: With Gans Subramanian, Managing Partner at Hourglass Venture Partners (Part 2)

Sramana Mitra: Let’s do a couple of examples to illustrate what you’re saying with some more visceral understanding. Pre-seed is a very interesting field of investment. There aren’t that many pre-seed funds.

Gans Subramanian: There’s another company in the cybersecurity space. These founders have a clear view of the problem. They are technical founders and have a path to $100 million in 24 to 36 months. This is pre-seed. The founders have been talking to us for the last six months.

Sramana Mitra: It has become very difficult to sell cybersecurity products and get meetings with CISOs or CIOs. A lot of early-stage VCs who are investing in cybersecurity are investing with a strategy – build to a certain extent and then exit. There is a lot of conversation happening in the cybersecurity investment world that is not looking to build hundred million dollars. You said $100 million in 24 to 36 months. I think that’s absurd.

Gans Subramanian: Value creation. You can get to $100 million valuation if you can get to $5 million in revenue.

Sramana Mitra: You are thinking the same way. You’re thinking of building capital-efficiently and getting to about $5 million in revenue in 36 months and then exiting into a sizeable cybersecurity company.

Gans Subramanian: It’s interesting you ask this question. We don’t want to think about the exit.

Sramana Mitra: I think that’s a flawed statement. Especially in cybersecurity, you have to think about exits.

Gans Subramanian: Those outcomes will come. When you start, you don’t think about that.

Sramana Mitra: That belief is okay when we were in 2000 and the market was a lot less crowded. You have to think through an exit strategy. Are you going to build with a small amount of capital for exit or try to swing for the fences? Those are two different strategies.

Gans Subramanian: Our thesis is this. So seed to Series B in 36 months and two rounds of capital in 36 months. If they can find a problem they can solve and get revenue, all options are on the table. From the get-go, thinking that we’re going to build this for an acquirer doesn’t happen. Swing for the fences is not our strategy. We don’t think about that because you can’t control that anyway. Focus on the execution and help them build great companies.

Sramana Mitra: Are you building for a full scalable channel or are you building a founder-led sales strategy where you get some number of customers to validate that this product works and get the attention of acquirers? Building a channel is expensive. Is that where you’re going to put in scarce money that you’re raising? These are vital decisions. These are all going to be concerns that you’re going to have to think through.

Gans Subramanian: We think about these things, but we believe that companies are bought and not sold.

Sramana Mitra: I think people are being very deliberate about where they’re going to go with things. What I’m very happy to hear is that you are looking at pre-seed. The gap in the venture market is in pre-seed. Also, it’s the highest risk in the investment cycle because there is very little proof point. Before, it used to be seed and Series A. Series A investors were doing what today’s pre-seed investors are doing. Now there’s pre-seed, seed, post-seed, small Series A. There’s this whole continuum. There are different venture funds against each of these rungs of the ladder.

That was not the case when venture capital started. Even in the late 2000s, regular VCs had to do what you are doing. They had to take very early-stage founders. Now that game has changed. The game has changed because founders are bootstrapping a lot more. Tell me about what your perspective is on founders who have bootstrapped to a point. How are you evaluating them?

Gans Subramanian: We just made an investment that bootstrapped. They raised a small amount of capital a long time ago. They’re at a $2 million run rate. When an entrepreneur has been in the market for a long time, investors may think that the founder is fatigued or something didn’t work out. We look at where the inflection point is and what help we can bring. Bootstrapping is great. During the bootstrapping phase, what patterns have they seen? Those are what we look for. Is there an opportunity to help them accelerate what they founded and double-down on it? In bootstrapped scenarios, we back founders. If we can back them with a good team and help them build a great team, we can accelerate.

Sramana Mitra: You’re right. There is a bias against bootstrapped companies that have been going for a while. Sometimes, it takes a while to find that inflection point. There is product-market fit, but there’s also timing. Maybe the market is not yet ready. Maybe the founders have anticipated something earlier than the market is ready for it. The inflection point comes later on in the continuum.

There are opportunities to invest in such companies where there has been a long bootstrapping phase but the inflection is now coming and it is ready to take off in a bigger way.

Gans Subramanian: I want to add to that. There are two things we look at in a company- deep insights into the problem and that the space is at the point of inflection. The founders have been around, they really figure out, “I tried all these experiments. Now this works.” If there is a sizable market, we back them.

Sramana Mitra: Thank you for your time.

This segment is part 2 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Gans Subramanian, Managing Partner at Hourglass Venture Partners
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