July 12th, 2013 The Hatchery: SoftBank Capital
On Friday, July 12, 2013, OLC attended The Hatchery’s weekly Friday speaker series. This particular event featured Nikhil Kalghatgi, Principal at SoftBank Capital. He talked about consumer product investing from an early stage.
“SoftBank Capital is an independent venture capital firm focused on early-stage high growth technology based businesses benefiting from the rapid deployment and adoption of broadband and mobile technologies. They are a team of experienced entrepreneurs and investors who take a hands-on-approach to investing in order to help each portfolio company achieve its potential.” The HatcheryNikhil Kalghatgi joined SoftBank in 2010. SoftBank is a venture fund that has been around since 1995. Its first trades were Yahoo!, Geocities—all Web 1.0 platforms. Its most recent form has taken to early-stage funding. Kalghatgi focuses mostly on earlystage startups.
NK: I’m from New Haven—that’s in Connecticut. I grew up around entrepreneurship.
I interned in biotech startups for a bit. I was recruited to do some military research for the government. I left to study at Tufts and started a company—a hedge fund with a colleague of mine. It was really hard, but really awesome and fun. I had to trick people into giving me money. Your first $100,00 is the toughest to raise. I didn’t want to be an engineer—I have some UI/UX background, but that wasn’t available back when I was in college. Well, the hedge fund was successful, thankfully. I went to start a mobile app analytics company. In 2007, we tried to time it right with the iPhone. I left that and decided that I wanted to do some investing.
I was in the first Tech Stars event in Boston—I met Brad Felds, got in touch with SoftBank and I’ve been there ever since.
You know, you can’t get a degree in VC. It’s much better when you run your own fund. This three of us [at SoftBank] raised $170 million Series A. It was a good and bad thing. Mobile is a big part of what we do. SoftBank is an independent venture, but we have a lot of money from one LP.
In New York, you can count the number of funds that has $150 million on two hands, but it comes down to how frequently they’re writing a check and how big they are. We have written 47 deals ranging from $500,000 to $4 million—but of course, every fund has exceptions to its rule. There are a lot of weird deals that VCs are forced into doing. At SoftBank, we do not leave our money in one fund. What happens when you plant a seed fund, the earlier you go, the more money you need to help aid it. The more people on the table, the better, but there’s a limit to that, too.
Mobile is horizontal, not vertical. I’d say that mobile advertisements in a native sense is impossible. Buzzfeed, for example, makes more money on CPM on mobile than desktop. Content on mobile should be designed for mobile, not designed for desktop then fitted to mobile. Desktop and mobile are completely different. In all of our content plays, about 60 to 65 percent are coming from mobile and mobile-exclusive ones have higher growth.
There’s a couple of rules of thumb to raise money: You’re going to need as much as you raise and that you’re going to need more money. For commerce companies, if you have to produce your own products, test it, find manufacturers, sell the product, the biggest issue you’re going to have is the cost of customer acquisition. It increases as you scale up and average order value goes down.
Of all the seed deals, 98 percent of them need more money. It varies from fund to fund. For us, seed deals are $500,000, series A deal, we do 1x. Seed funds do it differently.
Every VC says that they value add. You usually don’t get a fund—you get a person. I know what’s going on with my company every week. We have days dedicated to portfolios, but I try to focus on deals. Understanding how to sell is very important. I spend about a third of the year on investments, the other third on analysis and the other third on acting as a therapist. If a company says “I need help with XYZ,” I’m only going to help them with XYZ. VCs provide value in a lot of ways, but entrepreneurs need to know how to use their VCs.