Random Ramblings: A New VC Model

Venture capital firms often change their investment strategies, whether it be in terms of industry focus, geographic focus or company stage focus or deal size. The basic VC fund structure, on the other hand, seems to be timeless. For the uninitiated, this typically means: (i) A certain amount committed capital; (ii) An annual management fee charged on committed capital for LPs to pay GPs; (iii) A profit-sharing structure known as carried interest and; (iv) A set initial investment lifecycle and overall fund lifecycle. The most common terms are a 2-2.5% management fee with a 20-25% carried interest and a 5/10 year lifecycle, but it differs from firm to firm. 

The only real exceptions are corporate venture funds (e.g. Intel Capital), select evergreen funds (e.g. General Atlantic) and some public-private hybrids (meVC). Now there is another. 

It’s called Stage 1 Ventures, and is being headed up by David Baum and Jon Gordon. Baum is a former general partner with Prism who left during last year’s management shakeup, while Gordon is a serial tech entrepreneur whose companies have included Phoenix Technologies, EndPoints, DiagSoft and Patterson Labs. 

On its surface, Stage 1 is aimed at helping to fill the capital gap left by early-stage firms that have moved downstream. A bunch of these have launched on the West Coast – True Ventures, Tugboat Ventures, etc. – but Waltham, Mass.-based Stage 1 should help fill a continuing void here in the Rt. 128 corridor. But it isn’t the investment strategy that is of primary interest. It is the fund structure. 

Stage 1 has developed a unique model that puts more LP capital to work than do typical VC funds. It also will encourage the general partner to cut bait faster on troubled portfolio companies. The way it works is as follows: Stage 1 will raise a small general fund with an enlarged management fee and a standard carried interest. That management fee, however, will not be charged on committed capital, but rather only once capital has actually been invested. The firm estimates that this change should result in a guarantee that 92.5% of all LP monies will be invested in portfolio companies. 

The Stage 1 fund does not contain capital for follow-on investments. Instead, Stage 1 will evaluate each of its fund investments, and then use strict metrics for determining which ones deserve continued support. For example, they must be able to secure a “top-tier” VC firm to help lead the next round (i.e. Stage 1 will not lead twice in a row). For a portfolio company that does meet its hurdle, Stage 1 will form what it calls an SPIV, or special purpose investment vehicle. Think of it like a private SPAC, except funded by limited partners instead of the public markets. Each SPIV will probably be a bit larger than the entire initial fund, and will follow the aforementioned fee and carried interest structure. 

Stage 1 initially planned to let each LP decide which SPIVs they would like to participate in, but initial feedback has been that LPs would prefer it to be structured as a capital call. No final decision has yet been made. Expect initial LPs to be smaller institutions like municipalities, although Baum has lots of larger contacts via his time spent fund-raising for Prism. Curious to hear what LPs think… 

*** SAP Ventures is reloading, with the additions Palo Alto-based partners Jai Das (formerly of Agilent Ventures) and Nino Marakovic (formerly of meVC). It also has snared Andreas Weiskam, who had been working in SAP Corporate Development. 

The SAP Ventures team remains separate from the NetWeaver fund announced earlier this year, with the former more focused on ROI and the latter more focused on product ecosystem development. Expect additional partner hires in both Palo Alto and Germany, with the possibility of an India-based staff down the road (it just made an LP commitment to an India-focused fund). For more, pick up next Monday’s print edition of PE Week

*** Speaking of quiet additions, Chris Olsen has joined Sequoia Capital as a partner focused on the software and services sectors. He previously had been with Technology Crossover Ventures. 

*** A revised version of yesterday’s LBO Ceiling column is available here. The original version included some transposed statistics. I sent out a correction email, but it seems that not everyone got it. 

*** Zero2IPO, a Beijing-based VC data aggregation company, is launching its own fund