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With yesterday’s announcement that early-stage VC Greycroft has raised a $200 million growth fund, this type of fund has officially become a trend. But before we dig into the dynamics of it, let’s pay homage to the originator of this concept, Union Square Ventures.
In January 2011, USV raised what I believe was the first “opportunity fund.” Prior to this, plenty of VC firms invested across the early stage to late stage spectrum from the same fund (e.g. Battery, General Catalyst, Sequoia, Greylock, Bessemer). Others had separate early stage funds and late stage funds, often with separate teams and economics (e.g. Redpoint, DFJ, North Bridge) typically aimed at different opportunities. But the USV Opportunity Fund was the first time, at least in the post 2001-Internet bubble cycle (or last decade, if you want to put it that way) where an early stage firm created a separate fund to invest in late stage rounds of their existing early-stage portfolio companies. In USV’s case, Fred Wilson explains the strategy extremely clearly in the post The Opportunity Fund.
Greycroft is the latest firm to raise this type of fund. In the last week I’ve talked to two other early stage VC firms who are raising similar opportunity funds. In one case they referred to it as a growth fund. In the other case they referred to it as an opportunity fund.
In the fall of 2013, we raised a similar type of fund called Foundry Group Select. It was a $225 million fund, just like our other three $225 million funds raised in 2007, 2010, and 2013. But we called it “Select” instead of “Growth” or “Opportunity” for a specific reason – we only use it to invest in existing portfolio companies of ours.
USV has done a magnificent job of investing in later stage rounds of their existing portfolio companies as well as later stage rounds of companies that fit tightly within their investment thesis. We decided to drop the second half of that strategy as we didn’t want to spend time being late stage investors. It’s not natural for us as an entry point and we didn’t want to add anyone to our team since keeping our team size exactly the same is a deeply held belief of ours.
The decision to raise this fund came out of a combination of desire and frustration. We have a well-defined fund strategy, based on a constant size of each of our funds. Our goal is to make about 30 investments in each fund (2007 has 28, 2010 had 31) that range between $5m and $15m over the life of the company. Part of this strategy is that we are syndication agnostic – we are happy to go it alone through two or three rounds of a company if we have conviction about what they are doing. We are equally happy to syndicate with one or two other VC firms. Either way, while we focus on being capital efficient (we’d rather not overfund the companies we are involved in early), we are interested in buying as much ownership as we can at the early stages.
As a result, when a company begins to accelerate dramatically, we weren’t in a position to contribute meaningfully to the later stage rounds since we’d likely already have something in the $10m to $15m range invested. That’s the desire part of the equation – we knew we could make money off a later stage investment, but when we were talking about investing an incremental $1m or $2m it didn’t really matter much.
The frustration part was more vexing to us. In a number of our successful companies, we saw a long line of financial investors lining up to follow. None of them would engage as a lead, but all want to participate when a round came together. If a company was raising $30m, we’d have $50m+ of “followers” waiting to take whatever was left. We didn’t find that particularly helpful.
So we raised Foundry Group Select. We explicitly limited it to only companies we were already investors in and on the boards of. As a result, it is literally zero incremental work for us since we are already deeply involved in the companies we are investing in. This led us to an interesting decision – since we recycle 100% of our management fee, why would we charge a management fee on this fund if we are doing no incremental work? The conclusion was easy – we don’t charge a management fee. We only make money when the investments make money, resulting in very tight alignment with our LPs.
To date, we’ve invested from Foundry Group Select in Fitbit, Sympoz, Return Path, Gnip (acquired by Twitter), and Orbotix. It’s been a powerful addition to our strategy without creating any extra overhead on us.
I’ll end where I started – by paying homage to our friends at Union Square Ventures. They’ve led the way on many elements of early-stage investing post-Internet bubble, dating back to 2004 when Fred and Brad raised the first USV fund. As the “opportunity fund” becomes a trend, they’ve once again created something that, in hindsight, looks brilliant.
Time for a new Foundry Group video. If you want the backstory, go take a look at the post Foundry Group Announces Major Shift In Investment Strategy. If you just want a break from reality and hopefully a few laughs in the process, enjoy.
The video has over 100 easter eggs referring to either portfolio companies of ours or other things in our lives. Some are obvious (like the tshirts), some are very obscure. If you find one, list it in the comments. The best, most obscure one will win a special treat.
The lyrics follow.
Man, things are so hard these days
Tell me about it. I wish we could go back to when things just worked
You know, those old guys don’t know lucky they had it with all their technology 30 and 40 years ago
Y’all, you straight. Let me drop a story on you
I’m king of email, I craft a witty header
Anywhere, any time, life is so much better
Ninety unread emails. Inbox zero, hashtag #FAIL!
Life was better when we licked and stamped our letters
Gonna hit a new club with my favorite homie
Got GPS Satellites watchin’ over me
They got me to the spot, but they were off a block
Life was better when we trusted Rand McNally
Took 28 pictures of my gourmet dinner
I want to post them for all the world to honor
I shared on Instagram. No likes, I got no fans
My life was better with photos made of paper
I need a fact so I do a search on Google
All these results man, are giving me an eyeful
I see Viagra ads, That shit’s for older dads
My life was better using Dewey Decimal
Chorus: These are the worst of times (repeat)
So many videos, I could waste away my years
I’m rockin’ Gangnam Style, Harlem Shake has me in tears
Netflix, YouTube, Hulu, I got no time for you
Life was better with my TV and rabbit ears
Check out my new phone. Global connectivity
3G, 4G, I even got my LTE
So then I phoned my pop But still the damn call dropped
Life was better with faxes and a rotary
I found a website. Amazon, they sell it all!
Silk boxers, gouda cheese, they even got robotic balls
Addicted to “One Click.” Right to my house they ship
Y’all life was better fighting traffic at the shopping mall
I got my choice of every album ever made
iTunes, Spotify, anywhere I want it played
I just can’t choose between, Iron Maiden, Beiber, Sting
Life was better with my vinyl and mix tapes
Chorus: These are the worst of times (repeat)
This morning my partners at Foundry Group and I announced that we are going to make 50 seed investments of $50,000 each on AngelList between now and the end of 2014. We’ll be doing this via AngelList’s new Syndicate approach through an entity called FG Angel where we will create a syndicate of up to $500,000, allowing others to invest $450,000 alongside anything we do. For now, we are using my AngelList account (bfeld) which I’ve renamed Brad Feld (FG Angel). We are working with Naval and team at AngelList to get this set up correctly so that a firm (e.g. Foundry Group) can create the syndicate in the future, at which point we’ll move the activity over to there.
For years, we have had people ask if they can invest alongside us at Foundry Group at the seed level. We’ve never had an entrepreneurs fund, or a side fund, so we’ve encouraged people to invest in Techstars and other seed funds that we are investors in. As of today, we have a new way for people to invest alongside of us – via AngelList’s syndicate. The minimum investment is $1,000 per deal, so if you make a $1,000 commitment to our syndicate, you are committing to investing $50,000 alongside of us between now and the end of 2014 in the best seed investments we can find on AngelList. Simply go to Brad Feld (FG Angels) and click the big blue “Back” button. Special bonus hugs to anyone who backs FG Angels today (as I write this, the first backer has come in – from Paul Sethi – thanks Paul – awesome to be investing with you.)
This is an experiment. If you know us, we love to experiment with stuff, rather than theorize about things. We are huge believes in seed and early stage investing and through a variety of vehicles, including Techstars and our personal investments in other early stage VC funds, have well over 1,000 seed investments that are active. This has created an incredible network that adds to our Foundry Group portfolio. With FG Angel, we are taking this to another level as we begin a set of activities to amplify this network dramatically.
So there is no ambiguity, the investments come from our Foundry Group fund. All economics, including the syndicate carry, go to our fund. We are calling this FG Angel because we are approaching this the same way we do with any angel investment. I’ve written extensively about my own angel investing strategy in the past – you’ll see this reflected in what we are doing here. Over the years my angel strategy has been very successful financially and our goal with FG Angel mirrors that.
We expect we’ll learn a lot about this between now and the end of the year. When we learn, we’ll share what we learn. We believe deeply that the best way to learn about new stuff is to participate. So – off we go. We hope you join us – both in the syndicate and the ensuing network.
Our new video is almost out. Let’s do over / under bets on whether it’ll be here before Twitter goes public. In the mean time, enjoy the teaser.
If you’ve forgotten what you are in for, or never saw the first video, take a look at I’m A VC.
I’m crazy proud of my partners Jason Mendelson and Ryan McIntyre for their band Legitimate Front. In addition to being VCs, we each have a creative outlet that is super important to us. Mine is writing books; their’s is creating awesome music.
In August, their released the first album from their new band Legitimate Front. The idea of staying up until midnight on a Saturday night at The Fox Theater in Boulder is an odd thing for me, but I showed up and rocked out with them. And was totally, and completely, blown away.
Two of our old partners from Mobius Venture Capital – Greg Galanas and Carl Rosendahl – showed up to support them. And our IT Guy – Ross Carlson – made an impressive guest appearance on the sax.
They’ll have more gigs coming up in the future, including a magic top secret one in San Francisco in a few months. Guys – y’all rock.