Silicon Valley is just realizing that profitable companies are wise investments, but Austin-based Next Coast Ventures has a $130 million head-start in its second fund
, and it's not a stretch to see why some people are questioning the Silicon Valley model.
"I think it's called business for a reason," Smerklo said. "I used to always say gross margins don't lie. Selling a nickel for 10 cents is an interesting business model. Giving away the product and hoping one day scale will make up for it, maybe Walmart and Amazon have done it, but not many others have worked over time. Maybe I'm old-fashioned, but we look at the unit economics. It's a strategic decision.
"There's so much noise and clutter in the early stage that it takes more capital in later stage to really make a difference, and that's the zone we are playing in," Smerklo said. "It's exciting for entrepreneurs in Next Coast markets looking to do Series A to B, and that's the harder one, that's the gap we want to fill."
Next Coast also has investments in Utah, Montana, and Minnesota, according to Smerklo. In fact, 30% of its last fund went to markets outside its Austin homebase, and Smerklo intends to increase that ratio to 40% with the second fund. Many of these markets have lagged behind Silicon Valley in dollars invested and VCs themselves, but they are more robust in terms of weathering economic uncertainty, Smerklo said.
"We are supposed to be long-term investors, but it's hard not to look at short term indicators," Smerklo said. "We test any investment we make and ask how would this stand up in a different economic market. We are near the end of a bull market. There are a lot of companies that won't make it, but those aren't the investments we are making anyways."
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