1Mby1M Virtual Accelerator Investor Forum: With Bruce Cleveland of Wildcat Venture Partners (Part 4)

Sramana Mitra: Last question on trends, what do you make of unicorn mania? How do you parse it? How do you strategize given that it is a factor in the market right now?

Bruce Cleveland: One of the reasons why we like to do early-stage investing is there’s a lot of capital that has been locked into a lot of what we would call the established firms. They have a lot of capital to put to work. Once something is working, then what happens is you have a bunch of firms that rush in to put money in.

Once they’re in, what they want to do is try to put more dollars to work in that particular deal even if it’s not going to end up being a 10x multiple. A 2x multiple can still be quite effective to generate substantial returns if you’re putting $50 million or $100 million. TPG has a growth fund to lengthen out the time from when a company needs to actually become a public company.

There’re a lot of issues associated with that and a lot of perils that you need to be aware of if you’re investing in those things, or if you’re an employee. This is something that employees of these companies need to be concerned with. What doesn’t become apparent is what the terms of those dollars are. Those dollars can come with, what might be, a transference of wealth from the employees into the investors.

For example, there might be a participation preferred term put on the dollars which effectively says, “We’re going to take off the top of any IPO. We’re going to take 2 to 3x our dollars first, and then we’re going to participate with everybody else in the dilution of the IPO. That could take a lot of dollars off the table. There could also be other restrictions like when can it go public. You don’t know those things. They’re not exposed to the populace.

You think you’re going to have this great IPO event or M&A event, but what you realize is that your stock is worth substantially less than what you thought it was going to be. That’s one issue around this unicorn mania where you’ve got a lot of companies trying to propagate these companies to stay private before going public.

The other part is just valuations. Some of the stuff is pretty insane. Any hiccups in the business model can cause tremendous issues within these companies. While the business may be working in theory, there can be other issues that are associated with it.

We have three to five companies that you would call unicorns from our prior investing that are currently private. That’s great. We invested in them when they were either ideas or very early stage. We’re not counting on this unicorn status to make them successful. Business model, controlling revenue, figuring out your business are the important things to focus on.

Sramana Mitra: So what is your strategy when you have a company like that that has obtained unicorn status and is being showered with capital from the later-stage funds? Do you sell out at that point?

Bruce Cleveland: You can. A lot of times though there’re restrictions. Generally, you don’t have control and interest in that company. There’s a bunch of other investors around the table that may have a say in this. There are secondary markets that you can sell out into. That is a strategy. With the better investments that you do, there is a market for those. That is the way to liquidity.

Not a lot of this is really disclosed that often. You get contacted when people know that you’ve got an investment in a hot company. There are people who are willing to invest at this moment because they’re not looking for a 10 or 20 times return. They’re looking for 2 to 3 times return. There’re different predators that roam in the financial market and they tend to hunt you down.

Sramana Mitra: Great. Thank you for your time.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Bruce Cleveland of Wildcat Venture Partners
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