Sramana Mitra: Talk about the case studies of the two companies that you sold.

Kyle Asman: One of them was in real estate technology. It was a highly-profitable company with high revenue. They were pretty quick to exit. They needed some investment to grow some things and get to the next level. The other one was a secondary sale. That went from little in revenue and grew it well into the eight figures.

Both were focused on profitability. They understood that, in order to get where they wanted to go, they needed to be cash flow positive. You have to be thinking about cash flow positivity in this climate. That was their key to success.

Sramana Mitra: Are these SaaS?

Kyle Asman: One is a SaaS.

Sramana Mitra: What is the other one?

Kyle Asman: It’s a property technology. They’re selling to both consumers and businesses.

Sramana Mitra: I’m going to ask you a couple of questions about this bootstrapping to exit strategy. There is the traditional strategic sale option. Is that something that you are seeing as your natural exit path for the kinds of companies that you’re working on?

Kyle Asman: Their goal is not to become unicorns. A strategic can afford to buy them. Those larger Companies that go to later rounds are less likely to be acquired. Oftentimes, they’re not profitable and have significant cash burns. They’re just too expensive. Most of those acquisitions are financed by debt.

On the strategic side, if you’re a massive software company, odds are you’re going to sell to the Amazons, Apples, and Facebooks of the world. The government has gotten a lot more aggressive on antitrust. That has put some pressure on that high end of the unicorn market. Those companies are jammed.

The IPO market has been dead since the end of 2021. The larger companies in the technology space hasn’t been that acquisitive. The smaller companies have been getting acquired for strategic purposes. When I say smaller, companies valued under $100 million.

Sramana Mitra: Your exits have been at what price range?

Kyle Asman: One exit was far under $100 million. One exit was far over $100 million.

Sramana Mitra: I’m going to talk about our experience with strategic exit. There is actually a great market for strategic exit. The strategic exits don’t just happen to the very large companies. There are very robust SaaS companies in various aspects of the software industry. All of them buy companies.

We have actually sold companies from our portfolio with a bootstrapping to exit kind of track. Our analysis is, there are a lot of takers for that track. In SaaS, there are a lot of takers. There’s a lot of acquihire that goes on. There’s a lot of product expansion if you have product-market fit and if you’re generating revenue. The acquiring companies are looking for companies that they can sell through their channels. That’s one of the motivations.

Another one is to acquire a new kind of technology, AI being one of the core ones. Acquiring AI expertise via acquisition is going on in droves. The strategic exit option is a significant one. The vast majority of such exits happen at sub-$50 million range. It’s really important to be capital efficient. The other one that you mentioned – secondary – I’d like to elaborate on that.

Kyle Asman: If you have stake in a company as a primary venture investor and a private equity fund or a major bank wants to come in and buy that stake for strategic or financial purposes at a much higher valuation, that’s secondary. The secondary market is growing a lot more robust for private companies. They want to get LP liquidity.

Sramana Mitra: This is not an exit for the founders.

Kyle Asman: Right.

Sramana Mitra: This is a strategy of some funds who cannot do the prorate. They spend two to five years at investors. Then as Series C kicks in, they exit their portion. A lot of small funds are following this strategy.

Kyle Asman: As you mentioned on the prorate, it depends. A lot of times, we’ll invest if the company is a bridge round or a later round. If we invest in a company at a valuation of $6 million to $8 million and they’re doing a Series B or Series C at $100 million, the amount of equity that we would get at that valuation just isn’t worth it to put that additional capital to work. The returns are diminishing.

Sramana Mitra: The other thing that we have seen, especially in emerging markets is, it takes longer to build companies. Maybe it takes three years to get to $1 million. Then the growth to $100 million is going to be done by different VCs. The VCs have already spent three to four years going through that early company-building. This is another phenomenon. What is your game plan with the next fund?

Kyle Asman: The next fund is going to be similar in size with a very similar LP base and a similar thesis. This fund has worked out well for us. We’ll probably launch fund two in either the first or second quarter of 2023. At that time, I think inflation is going to start to curtail.

Sramana Mitra: Thank you for your time.