1Mby1M Virtual Accelerator Investor Forum: With Eric Benhamou of Benhamou Global Ventures (Part 3)

Eric Benhamou: A third trend is the fact that we are now moving, very fast, to the world of mobile commerce where many transactions are being carried out. Apple Pay is going to change the game. Nevertheless, you still have other opportunities for cybercrime. The point is mobile commerce continues to have a very steep ascending trajectory.

Transaction fraud is a big threat for all these mobile commerce companies. We’re very focused on that space. It’s a challenging space because even if you have a really great solution to reduce the rate of fraud in mobile commerce, you have to affect the entire ecosystem for your tools to have an impact. It’s not enough to demonstrate on a small sample. This is something which we think will be addressed by small startup companies as opposed to big players.

Sramana Mitra: I want to underscore one thing you said about the CSO’s priority in buying a cyber security solution. Being in the top three or top 20 makes a big difference. Being in the top three means that you have a decent manageable sales cycle and you will be able to scale a company at a pace that investors would desire.

If you’re in the top 20 but not in the top three, that is not the case. Sales cycle is unpredictable and it’s likely to be long. That dynamic slows down growth rates and investors tend to react negatively to that dynamic.

I’m going to switch topics a little bit. When we hear from VC’s, everybody is looking for unicorn companies. The truth, though, is that there are only very few unicorn companies that have been built in history. However, there is a tremendous amount of capital in our industry today. This is a tremendous amount of money chasing very few opportunities that are going to become these unicorn style successes. You have told me in many of our off-line discussions that your thesis is not to chase unicorn companies. Can you elaborate on that?

Eric Benhamou: It’s a point that I argue oftentimes with my colleagues in the industry. Don’t mistake the intent. I’d love for us to find a unicorn company but the problem with unicorn companies is that they’re extremely scarce. A lot of what makes a unicorn company is luck. Luck is something you cannot control. As an investor, I’m trying to strip out luck as much as I can. Let me start with the following observation.

In any given year, you have about 10,000 new companies taking early stage financing. In any given year, only five or less of these companies will become unicorn companies. It’s a very low yield. However, if you draw the curve of exit value compared to this universe of 10,000 companies, you’ll find over hundred will have created value upon exit. While the curve is clearly exponential, if you go one notch below in the curve based on exit values, you’ll find a hundred companies.

In other words, if you set your ambitions slightly lower, you have a much bigger universe of companies to target. If you can spot these companies and invest in them, and if you can ride the value creation curve from five to a hundred, you’ll create very substantial returns way in excess of industry average. The point is simply this. You don’t need to find unicorn companies in order to create substantial returns.

As long as you have a good hit ratio of companies, you’ll do more than find by anybody’s standard. To go from five to a hundred is something which does not necessarily involve luck. It primarily requires top notch entrepreneurs who focus on really good markets. The market is the one factor you cannot afford to get wrong. Market has to be super strong with very strong growth prospects.

If you’re able to get a good company with good entrepreneurs, you’ll ride that curve. This is not automatic. This is not just like catching a wind on the surfboard. This requires skills and mostly persistence. At least, it is much more in your control and does not depend on luck.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Eric Benhamou of Benhamou Global Ventures
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