Venture capital is an ever-changing ecosystem. The best emerging managers regularly invest alongside the most prestigious and established VC firms.
One such active and visible newcomer to VC is not a freshly-formed firm, but one of the oldest players in the investments world, Franklin Templeton, a more than 70-year-old asset manager based in San Mateo, California.
Like its mutual fund peers, Franklin Templeton’s entry into venture was a late-stage investor, backing pre-IPO companies out of its growth-oriented equity mutual funds and other public vehicles. The firm’s latest IPO exits include Bill.com, Cloudflare and Sumo Logic.
But the asset manager did not hold pat at the late-stage market. The firm started investing in earlier-stage tech start-ups over the last several years.
Franklin Templeton’s recent deals in this stage include a $14 million Series A round in Coherent, a Hong Kong insurtech start-up; Series B and Series C investment in SpotOn, a payments company; and Rigetti, a quantum computing start-up, which raised a $79 million Series C round.
These investments are funded out of the firm’s private vehicles, which appear to be structured as traditional venture funds backed by limited partners. The firm closed on a $75 million Franklin Talos fund in 2018 and raised nearly $85 million for a fund called Franklin Blackhorse in 2019, according to SEC filings. Neither fund has reported a final close. Since Franklin Templeton is a strictly regulated entity, the firm declined to discuss its venture vehicles and individual private investments.
Franklin Venture Partners, a strategy within the firm’s equities division managed by James Cross and five other “partner-equivalents,” sources and executes all venture deals for the asset manager. Over the last five years, the group has deployed nearly $1 billion in about 50 venture deals.
Venture Capital Journal recently spoke with Cross and Jonathan Curtis, tech portfolio manager and head of technology research, about Franklin Templeton’s venture strategy and being accepted into the VC ecosystem.
An edited transcript of the conversation follows:
What attracted you to private late-stage and earlier-stage companies?
James Cross: In about 2015, the Franklin Equity Group began exploring making late-stage private investments out of our mutual funds. We are strong public tech investors, and we felt that we could try to enhance our performance by building connectivity into the emerging technology ecosystem. As the only mutual fund headquartered in Silicon Valley, we believed we would have an advantage.
Along the way, we decided to also start investing in mid-stage start-ups, with a focus on enterprise tech and industrial tech.
Jonathan Curtis: We invest in these earlier-stage companies not only because they could generate direct alpha, but also because start-ups are a tremendous source of insight for our investments in public equities. Our relationships with portfolio companies and VCs that are backing them, help us understand our industries better. Our investments in start-ups allow us to notice disruptions in public companies earlier and we can capitalize on this knowledge.
You have backed a few companies at their Series A round. How do you define mid-stage?
Cross: We want to be flexible and open to the very best deals and founders and VC partners. We do not want to lock ourselves into a certain check size or a funding stage.
But for us, the division between mid and late-stage is very clear. Late-stage are companies that have direct plans to go public in 18-24 months.
Mid-stage companies have a longer time horizon, but they already have a developed product and are looking to scale.
How does your public equities expertise help with investing in VC-backed companies?
Curtis: The analysts that cover the biggest companies in our sector are the same analysts that are doing the work on the earlier-stage deals. We want our analysts to follow these companies through their entire lifecycle.
Cross: For mid-stage investments, we built a VC research process that is an extension of our public side. We are relying on our more than 30 analysts to analyze metrics such as unit economics, total addressable market and long-term margins.
Could you talk a little bit about penetrating the VC ecosystem and being on the cap table with traditional VCs?
Cross: At first, we were a bit nervous about what it would be like for us as a big mutual fund company to enter a much more relational-oriented, tightly knit venture ecosystem. I think what helped us is that we are here in Silicon Valley. Our kids go to school and are on the same soccer teams with many of the VCs’ and founders’ kids.
To our delight and surprise, most of the time we were welcomed, and once in a while, traditional VCs would ask, what is Franklin Templeton doing in this round?
I think we are way past that by now. We have invested nearly a billion dollars into about 50 private companies. We may sit on company boards with traditional venture capitalists. We often hang out with them before, during, and after board meetings where we discuss deal flow.
Start-ups often expect their VCs to provide advice in addition to capital. What value does Franklin Templeton bring to portfolio companies?
Cross: For our late-stage investments our contribution is obvious. We help companies get ready to go public.
Our value to mid-stage companies may not be as immediately obvious, but we are getting more experienced. We are now comfortable in the boardroom on almost all issues. We often take board seats, and our preference is to lead deals.