Early hit puts Formation 8 in spotlight

If Formation 8 Partners had a theme song, it might be Frank Sinatra’s “My Way”

Since inception, partners at the San Francisco-based tech-focused venture firm have done things their own way, whether it be setting fund size or determining how many overseas offices a newly launched VC ought to maintain.

The firm closed its first fund, a $448 million vehicle, in 2012 with a mantra to invest in early-stage Internet, software and energy tech companies tackling “hard problems.” It was the largest first-time fund since the dot-com boom, by partner estimates. (The firm announced last week it has raised $500 million for its second fund.)

The co-founders of Formation 8 are, even by venture standards, a well-connected bunch: Joe Lonsdale, co-founder of analytics provider Palantir Technologies; Brian Bonwoong Koo, a member of the founding family of Korean conglomerate LG Group, whose investment arm he formerly ran; and Jim Kim, formerly of Khosla Ventures and CMEA Capital.

From inception, Formation 8 wooed entrepreneurs by pitching the firm’s deep connections to Asian markets as a value add. The firm maintains offices in Seoul, Singapore, Shanghai and Beijing. Its LPs are also some of the largest Asian corporations, including Korea Telecom and LS Group.

“We definitely wanted a fund that had scale,” said Kim, who noted that helping negotiate partnering opportunities for portfolio companies takes a lot of effort, and “you don’t want to do all that work if you only have a tiny sliver of ownership.”

That said, partners didn’t want to raise something much larger than what they have, after looking at research showing that for funds above $500 million, it gets harder to return a multiple, as you need multiple home runs just to pay back LPs.

Luckily, Formation 8 LPs can already count on at least one home run return.

The firm scored one of the fastest huge exits ever for a new fund, when Facebook announced this year that it will acquire virtual reality headset maker Oculus VR for $2 billion. Formation 8 invested in two rounds in 2013 for the Irvine, Calif.-based company, alongside Spark Capital and others. Kim didn’t elaborate on returns, although media reports said the acquisition provided a few thousand percent rate of return.

Though Oculus is the deal with which Formation 8 is most closely associated, the firm has backed a number of other startups that have raised large up rounds or drawn considerable attention. The list includes RelateIQ, a developer of enterprise relationship management software that raised a $40 million round in March and a $20 million one in the summer of last year. Salesforce purchased the company for $390 million.

But while things appear to be working out according to plan in Formation 8’s first couple years of investing, Kim does have some concerns going forward.

One is that valuations remain aggressive for compelling companies.

“If you have a phenomenal entrepreneur who’s built several billion-dollar businesses and walks in the door with the next big idea, it’s going to be very competitive and everyone’s going to know about it… It’s like a knife fight to get into the very best investments,” Kim quipped.

This story first appeared in affiliate magazine Venture Capital Journal, which is published by Buyouts Insider. Subscribers can read the full story and related articles on the emergence of new venture firms by clicking here. To subscribe to VCJ, click here for the Marketplace.

Photo of a person using the Oculus virtual reality system from Shutterstock.