1Mby1M AI Investor Forum: Anupam Rastogi, Managing Partner at Emergent Ventures (Part 4)

Sramana Mitra: If you get companies at that inception stage – MVP with not really any revenue, just discussions with the market, but good precise discussion with the market, what size checks are you willing to write?

Anupam Rastogi: A typical check is $1-$2 million. We will do anywhere from 50-100% of the round. So the round size could be $1-$5 million or so.

Sramana Mitra: So you’re saying you are willing to write checks on MVP and market discovery discussions for $1-$2 million?

Anupam Rastogi: Yes, at the inception stage, it’ll be at the lower end of that. It depends a lot on the specific idea and how much it’ll take to build the product. So, if it’s a very complex enterprise infrastructure type product that can only be built with $5 million and you cannot demonstrate proof of concept without that, then some of those companies would raise $4-$5 million. But I’d say a vast majority of inception stage rounds will be $1.5-$2million, and we’ll do maybe $1-$1.5 million of that.

Sramana Mitra: What is your thinking right now on exit? Again, I’ll preface that with some of what we are hearing. There is a class of investors who are following the traditional venture capital model and chasing unicorns, and then there has emerged another set of investors who are looking to do capital efficient ventures and seeking early exit.

Some of that exit process could be into later rounds of funding, or it could be straightaway strategic exits. How are you looking at exits in this current market, given that the number of startups out there is very high right now?

The number of startups is already extraordinarily high, and it’s going to explode even further. As the AI infrastructure develops further, the infrastructure enables really, really lean startups. As this dynamic explodes, the number of companies is going to explode even further and finding exits for this number of companies is going to be really difficult.

Anupam Rastogi: Yes. Generally, for the venture path, that only works with those really large, eventual outcomes. We are a pre-seed and seed investor. We invest about 20-25 companies per fund, which we invest for four to five years. The way the whole model actually works is, at least a couple of the companies in our portfolio have to become really big venture scale outcomes. Often, that involves raising multiple follow on rounds.

All the big names in Silicon Valley have led rounds in our portfolio. So it’s a little bit of don’t play in a vacuum. So, we have to invest in things which someone else would invest in a couple of years from now, or the company can just get to such velocity and scale that it doesn’t even need to raise. That happens very rarely.

In most cases to scale, it’s not become cheaper. On the face of it, it looks cheaper. Prototyping has become cheaper. Building complex software has actually not become cheaper yet. It still takes as much time or effort, even with all the AI tools. Go-to-market has definitely not become cheaper. It’s again linked to how much overcrowding there is.

Sramana Mitra: With so much noise in the market, go-to-market is going to become more expensive.

Anupam Rastogi: To become big, companies do have to raise more capital over time. Of course, there are amazing companies and founders who are able to find other models with virality or PLG [product-led growth] where they don’t have to spend that much. Those are fantastic. But to answer a previous part of the question, we definitely need to see some path to a very large outcome and a founder that is really driven to do that.

Having said that, statistically most companies won’t get there. We also see in our portfolio a number of outcomes that could be a hundred, 200 million, and there’s a lot, that volume is a lot higher. Many of them don’t even get announced fully, right? Because for these large public companies, 50 or a hundred million dollars is not something they need to publicly announce. At the pre seed or seed, those could be good outcomes as well, but that’s not what we are investing behind. Fundamentally, we need to see that path. I think, again, the action piece for founders here is, think very carefully before raising any institutional venture money. Take that call of whether you want to go the bootstrapped route and maybe raise from angels or others because.

If I were personally investing as a angel, five x return would be fantastic, right? I invest at a 5 million valuation company exists for 25 million, I make a five x. If there was a good reasonable chance of that happening, I would love to do that.

However, as a pre-seed and seed investor, that’s actually the thing I’m trying to avoid very actively because there’s a lot of $25-$50 million opportunities out there and a lot of founders who would make life-changing outcomes with that personally.

 So that’s where the venture investment founder could be misaligned unless the founder is really passionate about building that big billion dollar type plus outcome.

That’s what I encourage founders is to think very carefully whether they want to go that venture route. And venture is a very, very specific type of rocket fuel, which once you take that, you have to get on that rocket ship. And then if you don’t, then you know, it’s not a desirable place to be in. So if you’re really passionate about building that big rocket ship, that’s where venture capital can really help you and help you accelerate very fast.

Sramana Mitra: I just want to clarify for those of you who are listening. The path that Anupam is describing is the traditional venture capital route. There, the thumb rule is, investors are trying to go from zero to $100 million in five to seven years.

That is the trajectory of a so-called unicorn venture. You are a hyper-growth company with high velocity and high repeatability. Without a high degree of repeatability, you cannot get to be these high velocity companies. That’s the route of traditional venture capital.

Now, the market is exploding in many different directions. The market is also exploding in the number of funds. There are tons of micro VCs in the market right now. They are kind of angel investors who have decided to raise small funds and operate single partner funds. Many of them actually don’t operate in the traditional venture capital model. Some of them are looking for these $50 million, $100 million, $25 million exit where there is a 5x return.

That class of investors does exist today, partly because of the explosion in the number of investors out there. So just wanted to clarify that for those who, those of you who are strategizing, we do have companies in the portfolio who are not looking to go the full venture route, not build a unicorn company. They want to build up to a certain point, get enough traction, enough validation, and then seek exit with a small amount of investment, $2-$3 million investment max.

As far as entrepreneurs are concerned, it is an acceptable path and you should decide which direction you want to go. Accordingly, you have to find investor-entrepreneur fit. The path that Anupam is describing, you cannot go to Anupam with this idea of getting a $25 million exit and a 4-5 x kind of return because that’s not what he’s looking for. But there are investors who are looking for that path as well. So I just wanted to clarify.

Anupam Rastogi: Yes, I think that fit is really important. It’s important to be clear both to oneself and to whoever you’re raising from and to have an alignment. Like you said, I think there’re a lot of angels and angel like micro funds, which are available very quickly. Raise a small amount of capital and as long as you’re upfront that we think there’s a very attractive $50 million exit opportunity here to build up something quickly and exit for $50 million. So there’s definitely more capital for that sort of play. But it’s just different from the classic venture path.

Sramana Mitra. Thank you, Anupam.

This segment is part 4 in the series : 1Mby1M AI Investor Forum: Anupam Rastogi, Managing Partner at Emergent Ventures
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