No, Virginia, the venture model isn’t broken. So say the guys at Greenhouse Capital Partners, a seed fund that just closed on $10.9 million.
The firm, based in Sausalito, Calif., was founded by David “Dino” Ferrara, a serial entrepreneur, Peter Henig, an angel investor and business journalist, and Michael Schwab, who runs a one-man seed fund called Big Sky Capital and is the son of billionaire brokerage founder Charles Schwab.
While large venture funds debate whether their model makes sense in a world of sub-$100 million acquisitions, Henig says there is no question it still works at the seed stage. An average sales price of $85 million for a VC-backed company isn’t sufficient for a large fund, but it it’s plenty for Greenhouse, which typically invests at $3 million to $5 million pre-money, he notes.
“If you’re a small enough fund, the model isn’t broken at all—it’s a beautiful model,” Henig says. “Yeah, you’re not getting rich on management fees, but that’s not the point of the game. The point is to help build companies, and we really like doing that.”
Henig, Ferrara and Schwab have been investing in and running startups for the past seven years, starting with ProcessClaims, which provides software and services to the insurance claims industry. Ferrara founded the company in 2000, soliciting help early on from Henig, his college roommate. Henig helped Ferrara write a business plan, put in some seed money and helped ProcessClaims raise a $5 million first round led by Big Sky Capital.
Eventually, ProcessClaims grew to be a profitable, 110-employee company and sold out to CCC Information Services Inc., returning 3x to the initial investors, Henig says.
After doing another six seed investments in companies that went on to raise venture capital, Henig and Schwab decided to formalize what they were doing by raising a fund. And because they could point to their success with ProcessClaims and “several significant up rounds” for companies they seeded, including MobiTV, their pitch was compelling to potential LPs, Henig says.
The limited partners in Greenhouse are principally high net worth individuals and family offices. The firm is still in talks with a “large strategic player from the cleantech space” that may put in a few million more.
If you’re a small enough fund, the model isn’t broken at all—it’s a beautiful model. Yeah, you’re not getting rich on management fees, but that’s not the point of the game.
Greenhouse will look at all sorts of seed stage investments, but it has an emphasis on cleantech deals, and is currently evaluating opportunities in solar power, “green” building technologies and biofuels.
The firm’s sweet spot is in the range of $250,000 to $1 million, a space where it believes it can fill a void. The goal is to find promising companies that need help to become “VC compliant,” whether it’s making introductions to potential customers or cleaning up their financial structures so that they’re attractive to larger VC funds when they need more capital for growth.
“What big funds need the most is quality deal flow,” Henig says. “We can act as a deal-creator, pre-VC fund where we provide value for entrepreneurs and the VCs.”
Larry Kubal, a Greenhouse advisor and partner with Labrador Ventures, thinks Greenhouse has a smart strategy. “Most larger VCs do not have the bandwidth or capital incentives to fill the fund-raising gaps at this level, despite the number of compelling investment opportunities,” he said in a statement.
In clean tech, in particular, lots of large funds have been raised, but there is a shortage of deal flow, Henig adds.
While its focus will be on seed stage deals, Greenhouse also plans to be opportunistic and participate where it can in follow-on rounds for companies that it has seeded. For example, it participated with Emergence Capital Partners and Rembrandt Venture Partners in a $7.4 million Series A for InsideView Technologies, a developer of sales performance software; with Labrador, WaldenVC and others in a $3.5 million Series D for MeeVee, a website that let’s people chat about and watch TV shows; and a $28 million Series D round led by D.E. Shaw Technology Ventures for Solaicx, a photovoltaic chipmaker.
Greenhouse’s first official seed investment was in Linkage Biosciences, a molecular diagnostics company. —Lawrence Aragon