[ibimage==39242==Original==none==self==ibimage_align-left]Ever want to get inside the head of a venture capitalist? How do they decide between investing $1 million or $8 million? How do they know which entrepreneurs they can trust? We sat down with Chirag Chotalia, the Vice President of Pritzker Group Venture Capital, to discuss the different variables at play when a VC is looking to invest.
A majority of Pritzker investments are during Series A or B rounds in which you typically invest $4 million to $8 million, but you have seen a lot of success at the Seed level when injecting $250K to $750K. How do you decide between investing early or waiting for that later round?
"We’ve had the good fortune of backing Dollar Shave Club and AwesomnessTV at seed, and HelloGiggles in which we led their seed round. We’re happy to do seed, but we certainly don’t want to overdo it. It’s not great for a VC, or an entrepreneur, to have a bunch of seed deals because it makes portfolio management unwieldy. You don’t want to over promise and under deliver to entrepreneurs, so we’re very careful in what we do at the seed stage.
What the venture community know us best for is our Series A and Series B investing, particularly in markets like Los Angeles and Chicago where there aren’t that many other Series A investors. There are a couple of funds out here in LA that are great and we love collaborating with them, but entrepreneurs just don’t have as much choice down here and that’s a void in the market that we’re filling nicely."
How do you decide how much to invest initially and how do different industries factor in to that decision?
"In this environment, we want to make sure a company is well financed to execute at least for the next 18 months. We work really close with the entrepreneur to figure out what amount of capital makes sense given the dynamics of the business. Some companies are more capital intensive given the industry that they're in or their business model, it really just depends.
Generically, Consumer is more capital intensive than Enterprise because you have to pay to acquire customers up front and there is a lot of marketing spend. Enterprise has some of that but the margin structure on Enterprise is so great— when you're doing SasS software, as you grow, you end up ramping down your cashburn needs because the margin structure of a typical SaaS company is upwards of 75-80% whereas the structure of a great e-commerce company is 45-50%. So you're dealing with companies that need to consume very different amount of capital to grow. For us, it's working in tandem with entrepreneurs to figure out what milestones they want to hit in 18 months."
Is it beneficial for a VC to focus their investments into a particular industry?
"Our firm to have a generalist approach. The firm is a collection of individuals that all have a specific domain expertise, but as a firm there are a lot of cross pollinations and learning between, for example, an e-commerce company and ad tech company. At the end of the day the e-commerce company uses the service of the ad tech company to acquire customers, so those learnings are very transferrable.
You’re missing out on opportunity when you restrict yourself to one or two silos because a lot of companies end up being connected in these ways. But for individuals, you kind of have to take a sector or two because there is so much innovation going on right now and there are so many companies and ideas that you can’t spread yourself too thin."
Do you pay attention to where other VCs are investing? How much does that factor in to your perception of a company?
"A lot of the best deals we’ve done are deals that other funds have passed on. There are certainly situations in which there are hot deals and everyone is trying to get in and everyone sees the value of the company. It’s hard to compete in those environments because, at the end of the day, it's often the highest valuation that wins.
There is a company in my portfolio that literally everyone passed on and if we had relied on that social signal, we would have missed out on what has become one of our best investments."
When an entrepreneur walks into your boardroom and begins his or her pitch, what do you look for?
"The most important thing is: do you lean forward? Can you see yourself working with this entrepreneur and are you inspired by what they are doing? It’s very intangible but you sit there and you think ‘I'm going to be spending anywhere between 5 to 10 years with this person. Is this somebody I want to do that with and potentially back on multiple efforts?” Because I think the best entrepreneurs in our portfolio are repeat entrepreneurs."
Was there a company or entrepreneur that you were sold on immediately? Or does it take time to foster that relationship?
"With The Honest Company it was so obvious from day one, but that’s because I'm substantially biased. I was an intern at Honest during business school before joining Pritzker. Brian Lee, one the founders, is one of my closest mentors and he really gave me my first opportunity in the LA market and then was kind enough to give me the opportunity to invest. Having spent as much time with that team as I did it was so obvious.
But one of the things we like to do is get to know people well before at a financing event. We do a lot of programming with entrepreneurs, a lot of dinners, a lot of gatherings where we can get to know people. It’s always best to meet somebody —both for entrepreneurs and investors— before they’re raising money. You, as an entrepreneur, don’t want to be rushed into making decisions that have long term implications for your company. It also allows you to do due diligence by talking to other entrepreneurs that they've worked with to get a sense of their reputation and how they react to both good times and times when things go south to make sure this is someone who has your back for the long run."
Have you ever been extremely impressed by an entrepreneur but had little faith in the idea they were pitching? How do you rationalize that judgment call?
"If you don’t feel that connection with the company it is hard for them to be top of mind and provide that intangible value that comes outside of the structured engagement that you have with them. I want to be excited enough that I’m constantly thinking about the company and looking for serendipitous ways to add value.
As an investor, it's not only my job to have structured engagement with my companies, like sitting on boards and adding value in that way, but also be constantly thinking about things that might help them. You’re doing a company a great service if you're constantly thinking about them and you're doing them a disservice if you invest when you're not leaning into the narrative because, by definition, you won’t be thinking about them as much."
If you want to hear more on the world of VCs, Chirag is appearing in Startup UCLA's Speaker Series on Wednesday, August 13 at 7 p.m.
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