Cendana Capital sees big returns via a fund of funds approach

Oscillations in seed financing did not prevent the San Francisco LP from continuing to raise larger funds and amassing $1.1bn in AUM.

When Michel Kim launched Cendana Capital in 2010, his thesis was that a fund of funds focused solely on seed-stage funds could generate strong returns. 

Since then, the number of seed rounds and seed funds have surged, only to cool down over the last couple of years. But the oscillations in seed financing did not prevent the San Francisco LP from continuing to raise larger funds and amassing $1.1 billion in AUM, across a family of funds, according to Kim.  

The firm is now raising a $195 million fourth fund, an almost 2.5x increase from its $80 million third fund of funds from 2017.  

Cendana has stuck firmly to the fund’s initial investment philosophy and it has been paying off handsomely. Most of Cendana’s funds are generating a more than 20 percent internal rate of return and four funds are performing at the top 5 percent in their category of Cambridge Associates benchmark statistics, Kim tells Venture Capital Journal.   

“I was trying to evangelize seed venture capital from the beginning,” Kim says. And despite all the growth, the fund of funds is still focused on seed, although it also has managers who invest in pre-seed companies.  

While there are hundreds of seed funds, Cendana believes that the list of firms that can be effective at that stage is short. “We look only for funds who can lead deals,” Kim says. He stresses Cendana GPs must be a partner to the entrepreneurs, helping them build businesses and facilitate the next round of financing.   

Cendana invests in about 15 “core” managers, writing each group a check for exactly $15 million per fund. These firms include Forerunner Ventures, IA Ventures, Lerer Hippeau Ventures, Uncork Capital, Freestyle Capital and others. 

Currently, seed rounds range from $2 million to $3 million at a $12 million to $14 million company valuation, Kim says. Cendana’s managers generally put up 50 percent of a seed round, a 10-15 percent share of the company, he explains.   

“Having a significant ownership percentage is very important,” says Kim. With a 15 percent stake in a company, a several hundred-million-dollar exit can return the whole fund, while a 1 percent ownership would not make a major difference in its performance, he adds.  

Kim says that Cendana has backed several first-time managers, but in every case wanted to make sure that the GP has experience to lead deals. “Before investing in Forerunner’s first fund, we talked to companies where Kristen Green was an angel investor and they told us that she could have easily led their deals,” Kim says of Forerunner’s founder. 

“We’ll generally take every meeting or a phone call,” Kim says about the process. Cendana prefers new firms to have a unique network or strong domain expertise and theme.  

Another criterion Kim looks for is a robust local venture ecosystem, including strong exit markets and an abundance of later-stage venture firms that can make follow-on investments.  For example, Cendana has been keeping a close eye on Europe where “Series A funds have been getting bigger,” but the LP has yet to back a Europe-based manager largely because exits have not been big enough, Kim says. 

But Cendana is serious about expanding outside of the US. In 2018, the LP raised a $40 million international fund and backed three “core” international managers: Entrée Capital in Israel, Golden Ventures in Canada and Cherubic Ventures out of China, with $7.5 million to each GP.  

The fund also runs a pilot program, investing $1 million in managers whose investing thesis may still need testing.  As an example, Cendana started Mucker Capital as a pilot “to see how LA tech universe will develop,” and has since converted the manager to a “core” partner. Mucker has performed well for the LP, bringing excellent returns with the sale of Honey to PayPal.  

Kim says that Cendana adds one or two pilot managers each year. The most recent pilot additions were managers in India, Australia and China.