1Mby1M Virtual Accelerator Investor Forum: With Cindy Padnos of Illuminate Ventures (Part 5)

Sramana Mitra: One of my observations is lots of stuff have already been built. Nowadays, there aren’t so many wide open opportunities, especially in B2B that you can consistently build billion-dollar companies. There are many niche opportunities.

Some of these businesses need to be built for very small amounts of capital – $1 million to $2 million and then sold for $10 million to $15 million. Maybe even smaller – $250,000 to $500,000 and then sell for $5 million to $10 million. Do you have appetite for these kinds of investments? What is your analysis of this dynamic in the industry?

Cindy Padnos: I think those types of businesses are really terrific business opportunities. They are businesses that an individual can have a very nice outcome with but they are not typical of what would be appropriate for a venture fund. A venture fund has to plan for losses. Our firm is pretty unusual in that we have as low as 10% loss ratio. The average at the seed stage is between 30% and 50%.

If you’re investing with the assumption that some are going to wash out, you also have to know that many are going to make up for that, that means returns can be 10x and above in order to get an average of 5x return overall. I’ve been a Founder of a venture-backed startup myself. I had to make that decision. Do I go out and raise venture capital? Once you’ve done that, you’re along for the ride.

Frankly, I would think that the best way to fund that type of business would be through angel investors, friends, and family, and even bank debt in situations where you’re able to bootstrap a company to a smaller recurring revenue stream. The right way to look at this is what type of investor do I need for what type of company and not make the assumption that every company needs venture backing.

Sramana Mitra: There is a bit of a trend of people forming funds around this investment thesis. I know some of them. They work very closely with corporate partners to understand what they want done outside of their own premises. Then have an understanding of the product roadmap and fund companies that are well-positioned into that.

These are small funds that would work with entrepreneurs in this mode but with a very tight corporate relationship where the exit is better understood and the product roadmaps of those corporate acquirers are better understood. It’s happening.

One way to look at this trend is the way you’re looking at it. Another way to look at this trend is that if you cut down on the loss ratio and if you do have a close relationship with a set of acquirers such that if you have a decent return on each of the funds and the loss ratio is very low, that is another way to deliver a 5x on the fund as well.

Cindy Padnos: Yes. I think the entrepreneurs have to know they’re signing up upfront for a part of that large corporation.

Sramana Mitra: For two to three years of work, you make $5 million. What is wrong with that picture? I think that that is a very nice picture.

Cindy Padnos: That would be very attractive, but it doesn’t always work out that way.

Sramana Mitra: It doesn’t of course. You talked about exit. Do you want to talk about any other exit?

Cindy Padnos: Xactly is exciting for the fact that it first went public in mid-2015, which was a very difficult time to IPO. Then about two months ago, it was acquired for over half a billion dollars. It was a very successful outcome for that team. The original founding team is still there which makes me feel great.

We’ve also had acquisitions in our portfolio. Our Pittsburgh-based company was acquired by Autodesk. It was a web-embedded 3D development platform. It was very interesting technology, it could do collaborative development in the cloud in 3D. Another in the devops area was acquired by New Relic about 18 months ago. They were building a platform that was being used by cloud development centers and operation centers to be able to monitor all of their servers.

Sense is another company that had built a data science platform allowed data scientists to do their work and collaborate rather than always having to build tools around their platform. It was acquired by Cloudera. It’s really the core of the recently announced platform that Cloudera came out with. Those are a few examples. We’ve had exciting outcomes within the portfolio and looking forward to more in the future.

Sramana Mitra: Wonderful conversation. Thank you for sharing your perspective.

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