Month: July 2017

Follow me @samirkaji for my random, sometimes relevant thoughts on the world of venture and start-ups. Although I’ve never raised a venture fund myself, I can claim having worked closely with managers on nearly 200 fund raises over the past 5+ years. These raises, coinciding with the incredible growth of new venture firms over the past 6 years, primarily relate to those in the Micro-VC sector (firms focused primarily on seed stage investing with fund sizes <$100MM). Using data from Preqin, the table below shows the yearly activity of sub-$100MM US funds over the past 5.5 years. Note that the data includes sub-$100MM fundraises for all funds, not just initial funds (i.e. Fund III’s would be included if they fall within the parameters of <$100MM and US). As the market has grown and evolved for new venture firms during this time, so has the temperature and characteristics of the emerging manager fundraising market. Headwinds and tailwinds exist today for hopeful emerging ventures managers. Despite the low yield economy and obvious ubiquity of technology, new managers face an increasingly saturated field, a weak liquidity environment, general fears of an economic downturn, and recently the highlighting of poor behavior by peers. Overall, the degree of difficulty of raising a Micro-VC fund is unquestionably higher than it was a several years ago. To provide some context on that statement, here are a few of my observations and thoughts about the current fundraising market: The length of fundraising cycle isn’t getting any shorter. In 2014, the average fundraising cycle from start to final close for a Micro-VC manager was 12 months. Today, the average fundraising cycle is closer to 18 months, and managers raising their first ever institutional fund should budget 1.5–2 years to raise their fund. There lies a large distinction for LP’s between new managers raising a first fund and experienced managers that have spun out from other venture firms. For first time managers with no prior institutional investing experience, the following should be expected: -Absent a long relationship with institutional- grade capital providers, a fund size of $10MM-$25MM (perhaps slightly more if multiple partners) is likely.Aiming for a $50MM+ target is ambitious and is something we’ve only seen a few first time managers reach. -An LP base that is likely to be made up entirely of family offices and High Net Worth individuals. With the growth in first time funds since 2012, institutional LP’s have significantly raised their bars for allocations, and are very unlikely to invest in in managers that don’t have prior strong and attributable track records. -Higher emphasis on authentic differentiation. I’d like to underscore the word authentic as the differentiation must...

Follow me @samirkaji for my random, sometimes relevant thoughts on the world of venture and start-ups.. In my last post, I illustrated the exit math necessary for a seed fund to generate a 3X net return multiple for its investors (LP’s). The portfolio construction of the fund used in the example is one that is most often seen for seed funds: ~30 portfolio companies, with about half of the fund reserved for doubling down on portfolio companies that show the most promise early-on. Having met or seen over 300 seed fund managers over the past 5+ years, we’ve observed that greater than 65% of seed funds have portfolio construction models that are very similar to the one noted above. This statistic is not all that surprising given the sound rationale that accompanies the model above along with the axiomatic nature of venture capital investing. While fund managers go to great lengths to differentiate on the basis of sector, stage, geography, brand, and value-add, they rarely steer from traditional structural items such as portfolio construction and economics. This is likely in part driven by LP’s, who historically have favored convention over innovation when it comes to the structural elements of venture funds (sidebar: I think LP behavior plays prominently in reinforcing some of the perverse behavior that permeates in venture investing, but that is to be saved for another time). However, in an industry where risk adjusted return performance for 75% of funds is middling to poor, it begs the question whether standard seed fund portfolio construction should be further evaluated as perhaps one of the contributing factors of poor performance. It’s well known that venture investing is inherently risky and many controllable and non-controllable variables determine fund success. As such, it’s imperative that venture investors not just what these variables are more importantly how they specifically correlate to their own investment models — — With the number of exogenous factors that affect startup success and the right skew of the value creation curve, venture investing is certainly a probability based vocation. The best VC’s are ones that construct methodologies that continually tilt the odds in their favor. Given that optimal portfolio construction is an unmistakably driver of fund success, let’s come back to it now. Despite the fact that non-standard portfolio construction models are often criticized (i.e. terms such as “spray and pray” are derisively used for highly diversified/low ownership portfolios), it stands to reason that standardized portfolio construction model may sub-optimize the probability and magnitude of fund performance if other specific fund factors aren’t considered first. Fund managers should instead decide on portfolio construction as a function of a thoughtful analysis of firm strengths/weaknesses, investment...