After an ugly falling out with his former partners at VSP Capital, Vince Vannelli has finally found a peaceful place to work—by himself.
VSP imploded two years ago after an alleged extramarital affair between two of the partners divided the partnership, leading to suits, countersuits and the collapse of the firm’s third fund. If you ask Vannelli if there’s anything he misses about having partners, you get a one-word answer: “No.”
Vannelli’s $15 million fund, KPG Ventures, is one of at least four single-GP funds that have been raised in the the last year and a half. Others include Maples Investments, run by former entrepreneur Mike Maples Jr., Tugboat Ventures, run by Dave Whorton, a former GP for Texas Pacific Group Ventures, and SoftTech VC, run by Jeff Clavier, former president of RVC Capital. In addition, a fifth fund, Kepha Partners, is in the midst of being raised by Jo Tango, formerly a GP at Highland Capital Partners.
These firms are more formal than angel investors—they manage money from institutions and high net worth individuals rather than their own. They’re the PT boats of venture capital—small, fast moving and nimble—designed to do the deals the hulking multi-hundred million firms can’t manage.
Two things kill venture firms: poor returns and internal dissent. Single GP firms don’t have to worry about the internal politics of a notoriously difficult business structure. “Great partnerships can be fantastic—they can provide a situation where one plus one equals three,” Vannelli says. “But there are very few great partnerships. I don’t think it’s a secret that a lot of partnerships are very difficult. It’s a very difficult organizational structure.”
And even great partnerships can succumb to poor succession planning or changing industry dynamics. Maintaining a positive dynamic can take tons of work. “One mistake people make is thinking that you have to have a lot of partners early on,” says Maples. “But the cost of having the wrong partner is really big.”
That flexibility and speed have won these VCs early access to hot Internet investments. Combine that with a funding gap between angels and typical early stage venture capital firms and you get a compelling opportunity for limited partners.
Of course, working alone can be hard for a VC. There’s no one to help with due diligence, to give a gut check on a potential investment or to hold down the fort when you go on vacation or get sick. It also can be harder to get attention from institutional investors looking to put tens of millions of dollars to work at a stroke.
But innovative financiers are finding ways around these problems and putting down promising bets by themselves.
Most successful Silicon Valley investors choose to join forces with others. Working with a team can allow you to focus on investing, save money, provide a sounding board for ideas and spread risk.
Almost every single-GP firm also employs one or two other people to keep the fund running. “The issue when you are solo is that you deal with all the aspects of the business,” says Clavier, who just launched a $12 million one-man fund in September called SoftTech VC II. “It’s important to have a great back office and to work with people who can help you do that.”
Otherwise, running the business end of a fund can be a time consuming task. Firms that have several partners can spread the cost of this staff out across all of its investors, but a single GP firm has to foot all of the same expenses without getting the benefit of scale. The cost savings of working with others doesn’t stop at the back office. Buying in bulk, even at a small firm, can help save money on office space, equipment, legal work and health benefits.
But the real benefit of working with a team may not be the cost saving as much as the butt saving. “The advantage of a partnership is that people can prevent you from doing harm to yourself,” says Maples. “I did time in both Foundation Capital and August Capital and became a big believer in that.”
Partners can steer you away from a bad deal or tell you that you’re crazy for believing in a specific business model or investment sector. They can also challenge you and keep you from getting stale. “You may also not be taking enough risk,” warns Whorton, the sole GP of $50 million Tugboat.
I don’t think it’s a secret that a lot of partnerships are very difficult.”
Vince Vannelli, Founder, KPG Ventures
There’s no doubt that having partners to keep you focused is an important part of the venture business, but those people don’t have to be inside your office. “In theory, you don’t have people to bounce things off of, but I syndicate a lot the deals and end up having a lot of interaction with other venture capitalists on a daily basis,” explains Vannelli.
Some lone wolf GPs won’t do a deal unless their trusted pals sign on, too. “I look for people who would be potential partners and vet the deal with them,” says Maples. “It’s such a benefit that I won’t hardly do deals by myself. The first thing I do when I see an interesting deal is call these people and ask if they’d want to be a potential partner. If I can’t get anyone interested in it, that’s a big sign and I probably won’t do a deal.”
Clavier has his own team that he relies on. “Ron Conway, Reid Hoffman, Josh Kopelman—those are the people who I can bounce ideas off of, and I always try to repay the favor,” he says. “You’re the sole GP, but you’re not making deals alone.”
Traditional VCs offer a word of caution about trusting your syndicate partners. “Are your interests truly aligned when you’re getting input from another venture group?” asks Clint Chao, a general partner at three-man Formative Ventures. He says working with outsiders “doesn’t offset the value of having another partner or partners on board who are completely aligned with your investment.”
The biggest advantage single-GP firms have is speed. They don’t have to spend time trying to convince their partners of the merits of a deal. “The Monday partner meeting is a real short meeting,” quips Vannelli.
And for some, that communication is the hardest part. “When you want to invest in early stage deals where there are a lot of questions still in the business, it can be hard to convey the value to a partnership—sometimes you just see it when others don’t,” says Clavier.
Ultra-early stage Internet investments—where most single-partner GPs are spending their time—can be particularly hard for big partnerships to wrap their heads around. And the time required to explain the company to your partners or fully vet the company can be the difference in getting the deal or not. “Sometimes you see a deal and you have 48 hours to decide if you’re in or not,” says Clavier.
That happened to Mike Maples. He sat in on a Y Combinator entrepreneur camp and watched the startups present. Afterward, he sat down with several angel investors also in attendance. “A bunch of us got together and decided Weebly was our favorite, so we said, ‘Let’s get them a term sheet this weekend,’” he says. The startup, which helps people make Web pages, raised $650,000 from Maples and angel investors Conway, Steve Anderson, Paul Buchheit and Aydin Senkut. “People later called to see if we wanted to partner on a Weebly deal, but it was already done,” Maples says.
That’s not the first time speed was important for Maples. He had a shot to step in and help out Revision3, the media startup founded by the boys behind Digg, but he had to act fast before they turned to another investor: “Revision3 was concerned about whether they were going to have enough money to sign a lease,” he says. “I basically said I’d be there in 24 hours. They walked me through what was going on and I said I could give them a loan for the amount they needed. I didn’t have to go back to my partners. I could be Johnny-on-the-spot.”
LPs take notice
Single-partner firms might seem a little strange to limited partners. But at least two solo-flyers have successfully collected cash from institutions: KPG and Tugboat.
KPG’s Vannelli invested his own money for awhile—after settling his suit associated with VSP—then he approached Adams Street Capital about a formal fund. Adams Street cut him a check for $15 million and effectively bought his portfolio of pre-existing deals. Vannelli charges Adams Street his expenses and will collect an undisclosed amount of carry if he exits any of his investments.
Tugboat’s Whorton also raised institutional money. His LPs include Horsley Bridge, Knightsbridge Venture Capital, Legacy Ventures and Vanderbilt University. But it wasn’t easy. “It looks strange to almost everybody,” he says. “There are some people out there who believed in the type of model I proposed. It was a wonderful vote of confidence.”
Former Highland GP Tango hopes to join Whorton and Vannelli in raising institutional backing. He set out in April to raise $50 million for Kepha Partners. Tango declined to comment about his firm or its fund-raising.
It can be hard to convey the value [of a very early stage deal] to a partnership—sometimes you just see it when others don’t.”
Jeff Clavier, Founder, SoftTech VC
Other solo-GP outfits have no interest in institutional investors. “I’ve never bothered sitting down with LPs because I did that in a previous life and didn’t really like it,” says Clavier. He declines to name his investors, but says that most firms in his position raise money from individuals.
Many institutions couldn’t invest in single-GP funds even if they wanted to. “Many LPs can’t have more than 10% of a fund, for example, and those numbers rarely match a solo-GP fund,” Clavier says.
Other LPs voice concerns about what might happen if the GP of a solo fund were “hit by a bus.”
Maples turned to friends for his solo flight. “Most of the funds I’ve raised are from relationships I’ve had from Austin, Texas, since I moved here [to Silicon Valley],” he says. His nine limited partners meet with him about once every 90 days. “I don’t have a single limited partner that I haven’t known for 10 years. I tell them the truth with no tricks. It helps when you’ve known your partners for that long. There’s a lot of formalities you avoid and just get straight to the issues.”
Now-reticent institutions may decide that single-partner firms are attractive if Vannelli, Whorton and Tango post decent returns. Of course, taking more money might mean picking up another partner. “My firm isn’t necessarily a one-partner firm by design,” says Maples. “It just happens to be the case, but I haven’t said for the rest of my life that that’s going to be the way it is. If it’s right to have a partner in the future, that will become obvious at the time.”
For his part, Vannelli has no plans to bring on a partner anytime soon. “There are a lot of great people out there, but I don’t feel the need to have a partner or two,” he says. “I’m already married.”
SOLO-GP FIRM PROFILES
Location: Waltham, Mass.
Head: Jo Tango
Background: Tango, formerly a general partner at Highland Capital Partners, set out in April 2007 to raise a $50M fund.
Deals: File server virtualization company AutoVirt, content sharing software maker PeerMeta.
Contact: 781.577.0355 or www.kephapartners.com
One mistake people make is thinking that you have to have a lot of partners early on, but the cost of having the wrong partner is really big.”
Mike Maples Jr., Founder, Maples Investments
Location: San Francisco
Background: Launched by Vannelli in 2006. Previously a general partner at VSP Capital, Vannelli made a number of investments as an angel investor. Those investments were rolled into KPG after Adams Street Partners came in as the firm’s sole backer.
Fund size: $15M
Investor: Adams Street Partners (sole backer)
Deals: Mobile publishing company Abazab, online media conglomerate Active Athlete Media, next-gen instant messaging platform company Doppelganger, new media company LudicLabs, software startup Qwaq, search engine Sphere, and vertical advertising network Teracent.
Contact: 415.781.6800 or www.kpgventures.com
Location: Menlo Park, Calif.
Mike Maples Jr.
Background: Maples raised the fund in 2006. He previosly co-founded Motive, a broadband software company, in 1997
Fund size: $15M
Investors: Nine wealthy individuals
Deals: Content recommender Aggregate Knowledge, film distributor Bside Entertainment, student marketplace Chegg, online customer demand management company Demandforce, social news site Digg, casual game marketplace Kongregate, content company Revision3, IT management software company SpiceWorks, data analysis startup UltraRPM, website builder Weebly, and advertising company YuMe.
It’s great to be in a position where I have a highly focused portfolio and I can invest a lot of my time on a few companies.”
Dave Whorton, Founder, Tugboat Ventures
Contact: 650.704.2131 or www.maplesinvestments.com
Location: Palo Alto, Calif.
Background: Clavier started the firm in 2004, then announced his first fund, SofTech VC II, in September 2007. Clavier was previously president of RVC Capital, which manages the Reuters Greenhouse Fund. RVC has $600M under management in 82 companies, including Yahoo, Verisign, Phone.com and Infoseek.
Fund size: $12M
Deals: Social media companies Buzznet, Mint, MyBlogLog, Socializr, Maya’s Mom and Dogster; search-and-discovery companies Feedster, Kaboodle, Loomina, Edgio, Wikio and Truveo; consumer infrastructure companies BrightRoll, Userplane, RapLeaf, Mashery and OmniDrive.
Contact: 650.688.1801 or www.softtechvc.com
Location: Menlo Park, Calif.
Background: Founded by Whorton in 2006. Whorton was previosly an associate at Kleiner Perkins Caufield & Byers and a general partner with Texas Pacific Group Ventures. He was also CEO of Good Technology (acquired by Motorola) and co-founder of Drugstore.com (Nasdaq: DSCM).
Fund size: $50M
Investors: Horsley Bridge, Knightsbridge Venture Capital, Legacy Ventures and Vanderbilt University.
Deals: Social networking company Doostang, car-wash company Siteler, stealth company Five Apes, and stealth company Spitfire Labs.
Contact: 650.255.7873 or www.tugboatventures.com