1Mby1M Virtual Accelerator Investor Forum: With Cindy Padnos of Illuminate Ventures (Part 3)

Sramana Mitra: I have a specific question that relates to our community. We have a global base of entrepreneurs. Very often, entrepreneurs have their development teams elsewhere, whether it’s India, Eastern Europe, or other parts of Europe, but they’re aware of the fact that if they’re going for enterprise customers, North American customers are the primary customer base they want to go to.

How do you look at those companies? How do you define North American companies? Do these kinds of companies fall within your scope or are they outside?

Cindy Padnos: They’re well within our scope. Most of our companies have a portion of their development resources offshore.

We recently invested into a company that has their entire development team in Australia. The CEO and two other founders are here in the Bay Area. They plan to build out much of the rest of their team here. We have a team with development team in Eastern Europe. Interestingly enough, having a development team in Philadelphia or in Canada can be just as helpful as having one in India.

Sramana Mitra: I completely agree.

Cindy Padnos: We’ve had a very interesting focus outside of the Bay Area. We tend to do experiments. An experiment we started last year was something we call “student in residence” program. We have a part-time student now at Carnegie-Mellon University who is doing deal sourcing for us.

He’s a first year student at the Masters program at the Tepper school. He participates in all of our deal flow calls. We found him an internship with one of our portfolio companies here in the Bay Area. It’s really a virtuous circle on how he’s sharing deal flow and we’re bringing more of the Silicon Valley ecosystem to Pittsburgh. We think it’s going to be a very nice collaboration over time.

Sramana Mitra: Very nice. I’m going to ask you some broader trend questions. How do you process the current investment climate where capital is moving further and further upstream? You mentioned that you come in before the Series A investment but after the angel investors. It sounds like you have identified the Series A gap and positioned yourself to mitigate the Series A gap. Can you elaborate?

Cindy Padnos: It’s generally feasible for an entrepreneur to raise capital from friends and family or the doctor next door. Generally speaking, there’s a significant gap between that and what it takes to get to that next step. In the market, the expectation is that a company is running at somewhere between $1 million to $2 million in ARR.

That’s non-trivial especially if you’re selling something like developer tools that are sold at $500 a year. We have found that it’s really an important role for us to play to help those companies get from MVP to that million in recurring revenue. We tend to come in and help with go-to market strategy and with finding even the first customers, and iterating through that process.

Sramana Mitra: My observation is the early stage investment game has split into almost four different segments. You have the individual angels or micro-funds that are $5 million to $10 million funds. Then you have funds like yours. Then there is another set of investors who are these $50 million to $100 million fund who do the $1 million to $3 million Series A.

If a company is ready for a $5 million to $10 million Series A, then the larger funds can do the Series A. Otherwise, they’re a Series B kind of fund. That’s a big change from the way venture used to be. The $300 million funds were doing the Series A at one point.

Cindy Padnos: I think you’re right. The only nuance I would add is that the third type of fund that you mentioned, those are post-seed. You actually want to be careful about signaling what message you send about what stage your company is really at. The other thing that I think is a very important nuance is there are a variety of different types of seed rounds.

The kind that we avoid are those that we call club rounds where 6 to 12 funds come together and each write a $100,000 check. That’s a very dangerous situation to be in because no one investor has any real skin in the game. Often, there’s no Board structure to it. 

When it comes time to raise Series A and the company is not ready, what you find is no one is stepping up to give them additional capital or to help make the introductions. It just was never an opportunity that was important enough to them to put that kind of effort into.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Cindy Padnos of Illuminate Ventures
1 2 3 4 5