Why do you back new venture capital fund managers?
In one sentence – “We back new managers when there is a great risk reward imbalance.”
Our effort to invest in the best performing new venture funds began in 2006. Early that year, Ken Wallace sent me and email announcing he was leaving Bessemer Trust’s venture capital fund of funds to attend the UC Berkeley, Haas School of Business. I knew Ken as I had tried (unsuccessfully) to raise capital from his team at Bessemer. I thought he would have a good perspective on the market and respected his ability to pick managers so I asked him to join us for his summer internship to help us analyze the market for primary venture capital commitments. By this time we had acquired limited partnership interests in over 50 venture capital funds through secondary purchases and most of the managers were asking if we’d invest in their new fund. Ken concluded that we should buy or partner with an existing fund of funds team that we respected as opposed to raising our own fund of funds as it was not our core competency.
In late 2008, we met Roland Reynolds via a referral from Bob Raynard at Standish Management. Roland was smart, diligent and entrepreneurial (all qualities we like). He had previously worked as a Principal at Columbia Capital where he became convinced venture capital funds would outperform the market over the next decade. He had founded and raised his own fund of funds focused on smaller venture capital funds and asked us to invest in our fund. When we accepted his investment in our new Fund V, it became clear that he could be the firm and partner that Ken had recommended we find. We were focused on buying secondaries in venture backed companies and funds and Roland was focused on primary commitments to new venture funds – we were completely complementary.
While we began to work more closely with Roland over the next 12 months, we continued to look at other opportunities for entering the early stage fund market.
In the spring of 2009, I sent an email to our friends of the firm list to notify them we had closed our new secondary fund. One of my colleagues replied and we worked with him on forming his first venture fund.
Many venture capital managers who know the manager and also our firm have asked us…. “Why did you fund him”…. To us it was simple. It came down to multiple reasons:
- We knew and trusted him already and had previously worked with him.
- We understood that some of his investments had a high likelihood of becoming large outcomes and he was one of the first angel investors.
- He had a great rolodex and investors that was impressive.
- He understood that our investing with him was a partnership and he was open to working with us in various ways to access investments.
- He agreed to put his money where his mouth was and contribute a large percentage of the fund himself.
- We knew he would work hard to make his investors money and do the best job he could sourcing and finding breakout investments (he had a proven track record already).
After we funded the fund, Roland contacted us to say that he would love to be a part of our firm and team to build on these efforts. It was clear to us at this point that we had unique access and opportunities to grow another investment strategy – funding and working with small venture capital funds. In September of 2009 we acquired Roland’s firm and Ken moved over from the secondary team to help build our venture capital fund investment strategy. They subsequently wrote and published a white paper on our strategy (it can be found here).
As a firm we have consistently backed first-time funds launched by individuals or teams that we have deep respect for and long-term personal relationships with. In addition, we invest with managers in their second fund after we have developed a relationship and understanding of their firm and portfolio. We believe that when we back a firm’s first fund, it is the beginning of a long term partnership.