San Francisco-based Preface Ventures is gearing up for more liquidity as covid-19 spurs business activities within the enterprise technology sector and makes an economic case for backing diverse founders.
Farooq Abbasi, founding partner of the early-stage investor, said the pandemic highlighted the importance of enterprise technology, a sector that was already on the upswing before covid-19 and has continued to grow.
“The majority of the IPOs that have done well in the last six months and beyond have been enterprise [and] that’s because the outlook is bright,” Abbasi said. “People often underestimate the size of the market. Everyone uses it.”
Preface started raising a $23 million institutionally-backed fund at the end of April. The firm previously invested from a friends-and-family fund. Abbasi said the vehicle will invest in enterprise technology and hopes to reach out to diverse founders. The venture firm will focus on security infrastructure, healthcare and fintech.
Abbasi said investors of enterprise technology should expect more chances for large, billion-dollar exits at greater frequencies, which he believes will continue this year. Unlike consumer tech, he said enterprise software attracts a variety of companies interested in not just investing, but in acquiring start-ups.
Palo Alto Networks bought two of Preface’s portfolio companies in the security infrastructure space, RedLock and Zingbox. RedLock was acquired for $173 million in 2018 and Zingbox followed in 2019. Among its other portfolio companies is artificial intelligence security developer Ambient.ai.
Abbasi said there is still a gap in funding for enterprise technologies at the seed stage. He noted that founders of start-ups working on enterprise infrastructure software usually start as engineers in larger companies, and have been quietly working on their solutions and don’t have easy access to VC networks to raise successive funding rounds.
Still, the enterprise tech sector has seen tremendous growth in the past year and is poised to continue its upward trajectory. Data from Bloomberg showed the enterprise technology sector attracted $30.4 billion from venture capital firms in 2019, almost double from 2018. Companies will continue to evaluate their digital transformation and expand their technology footprint, according to Deloitte. This could lead to more mergers and acquisitions.
Diversity as a strength
Abbasi said founders of enterprise technology start-ups often come from immigrant backgrounds, which is why diversity is a focus for the team at Preface. Part of their investment strategy is to reach out to founders who may not have access to the same networks as others.
Preface’s first fund was also focused on diversity and invested in 23 companies within the same sectors it plans to pursue in its next fund.
“If you look at the most profitable venture capital investments, they are in enterprise infrastructure, and they’re led by vice-presidents of product, and they’re led by immigrants and people from different backgrounds,” he said. “They’re not from the old boys club and they might have an accent, and they might not be able to articulate beautifully the company in the way that a VC wants to receive it. But the way that a VC wants to receive information isn’t necessarily correct.”
Abbasi is also co-founder of Diversity VC, a group seeking to build a network of diverse venture capital professionals and help other venture firms hire talent from different backgrounds.
Abbasi said many companies they work with had founders with an immigrant background. He noted that many of Preface’s LPs also care about diversity and offer a broad network for sourcing. “LPs are excited about the upside and performance, but they’re also excited to help founders who were like them; people who at some point in their career gave them a shot and made a massive impact. We share a similar approach to data and believe there’s a real economic reason for diversity.”
Preface counts among its LPs endowments and funds of funds. More than half of its LPs are females or people of color.
One LP Abbasi singled out is Plexo Capital, led by former GV partner Lo Toney, who launched the firm to invest as an LP in underrepresented female and diverse managers and directly into companies.