Sovereign LPs find an avenue into venture through seeded funds

On first glance, Vertex Ventures US fits the bill of an average successful early-stage venture firm. They are based in Silicon Valley, focused on enterprise tech and active on their Medium blog page.

While all of that is true, the firm is also anchored by behemoth state investor, and sovereign LP, Temasek and joins a handful of other seeded firms like it as sovereign LPs look to grow their play in the venture game.

Sovereign money managers and investment holding companies have been increasingly growing their presence across the venture market for years. A recent report from PitchBook found that direct deals involving these LPs have increased by 9x since 2010, and the funding in these transactions has increased 19x over the last decade.

These sovereign LPs have also committed to more than 1,100 venture funds since 2000, according to PitchBook data.

While it may make more sense on paper for these LPs to invest at the later stages where the rounds are more sizeable, or only in megafunds, some, like Temasek, have begun to seed smaller venture vehicles. This allows them to get involved with the asset class with more consistency without having in-house expertise, says Kyle Stanford, a venture analyst at PitchBook.

“What I thought was the most interesting when we started looking at and talking to these sovereign [LPs] was the seeding of venture funds around the world,” Stanford says. “Especially Temasek, it has Vertex Holdings. It’s a way that these LPs are able to expand their reach all over the globe without having a dedicated team in-house.”

New breed of GP

Vertex Ventures US was founded in 2015 by a team of former entrepreneurs and investors. It focuses on early-stage IT and enterprise tech. Since its founding, the firm has raised two $150 million funds each anchored by Temasek. The firm is deploying out its second vehicle which closed in 2019.

In Sik Rhee, a general partner at Vertex Ventures US, says that when he and co-founder Jonathan Heiliger were looking to form a new fund and were approached by Temasek about joining the Vertex network, they thought it was a great opportunity.

“They had started a mandate to think of the US as an important region,” Rhee says. “That’s when serendipity struck, and we crossed paths and decided to join up together. Vertex was already a brand, operated in different geographies, and already had a pretty good track record.”

Rhee says that the US firm is currently focused on opportunities in data security, work from home and digital transformation.

The firm most recently led a $13 million Series A round into Upsolver. The data analysis company also grabbed capital from Wing Venture Capital and Jerusalem Venture Partners, in addition to multiple high-net worth individuals.

Vertex Ventures US is one of six funds that make up Vertex Holdings, all anchored by Temasek, which focus on either a specific geography, like Vertex Ventures US or Vertex Ventures India, or a strategy, such as Vertex Ventures Growth or Vertex Ventures HC, which invests in healthcare.

Yaniv Stern had a similar experience. Stern is a managing partner at Israel-based Red Dot Capital Partners. The firm was founded in 2016 with its first fund wholly backed by Temasek. Now on its second vehicle it, Red Dot has started to build its LP base.

The firm is a generalist technology investor focused on growth-stage companies in Israel. Stern says they are particularly excited about areas like cybersecurity, dev ops and multi-disciplinary tech solutions. Red Dot recently led a $35 million dollar Series B round into EverC, a cyber intelligence tool.

Big benefits

While Rhee’s and Stern’s firms focus on different market stages in different geographies, they are similar in that they get to glean the expertise and global network of investors and companies that come with having a sovereign LP as a fund anchor.

Stern says that he feels Red Dot is able to invest in some more specialized areas within tech that Temasek has prior experience in and can provide guidance for that other generalists may avoid like agtech.

He adds that in addition to expertise the firm might not have normally, it’s also beneficial in terms of tapping a network of potential connections that would be tough for a firm like Red Dot to have otherwise.

“[Red Dot] is a small fund, from a global basis, but being part of this ecosystem it’s great to meet people you wouldn’t necessarily have access to being a small fund in Israel,” Stern says.

He adds that this network of companies and corporate partners can also help on the due diligence side as the firm can use these resources to get a better feel of a potential start-up’s market fit.

“When you do find synergies with potential customers in Temasek’s ecosystem, the risk for the company is different on the diligence side,” Stern says.

Rhee says it’s also helpful to tap into the network when a portfolio company is looking to expand, especially into Asia, or scale out of the firm’s investment range.

“We will see that happen as companies scale beyond the growth stage as well as our US companies that want to go global,” Rhee says. “We have helped convert some very interesting opportunities for companies in terms of follow-on rounds. The growth fund looks and participates across the funds. That’s helpful to have larger check writing abilities.”

Both Rhee and Stern say that it’s incredibly important that, while they are able to leverage Temasek’s reach and global presence, they are also able to remain independent investors regarding due diligence and in terms of strategy and timing.

“One of the key things is not only independence and decision making on an investment itself but also making it very clear that the focus is on delivering the best returns to the fund,” Stern says.

Market players

Temasek isn’t the only sovereign LP approaching the market from this angle either.

Taiwania Capital, founded in 2017, is seeded by the National Development Fund of Taiwan. The fund is investing out of its $200 million second fund into pharmaceutical and biotech start-ups in Asia and the US.

The firm recently led a $55 million Series E round into Lexington, Massachusetts-based Fractyl Laboratories, which develops therapeutic treatments for metabolic diseases.

The Alaska Permanent Fund does this as well. The sovereign wealth fund seeds Constellation Capital which invests in growth equity, private equity and debt in addition to venture.

These types of relationships and funds seem keen to grow as many of these sovereign LP backed-firms have been formed within the last five years, and some already count unicorn companies in their portfolio.

While these sovereign LPs may seem too big to invest in the venture market, the opportunities also seem too big for them to ignore.