Venture capital is a lot like high school. It’s cliquish and insular. And now that the industry is rapidly shrinking, LPs only want to hang out with the popular firms.
If you’re the new kid in town, good luck getting any respect. True, there are some, such as Aileen Lee and her Cowboy Capital firm in Menlo Park, Calif., that are already well known and garnering lots of attention. But many first-timers are based outside of Silicon Valley and are flying under the radar, such as St. Louis-based Cultivation Capital, which is backing early-stage startups in the Show Me State.
What’s more, there is a smaller proportion of first-timers this year than in the previous two years. Through the first three quarters of 2012, there were 38 new funds raised, comprising 27% of the 139 total venture funds raised to date, according to Thomson Reuters and the National Venture Capital Association.
In 2011 and 2010, new funds comprised nearly one-third of all funds raised. Whether new funds pick back up or their decline is a reflection of a shrinking venture industry remains to be seen.
To a degree, the four new funds profiled here conform to teenage archetypes. There’s the girl next door, the overachiever, the cool kid and the computer geek.
Read on to find out how these firms are adapting to their new surroundings and becoming part of the in-crowd.
Forerunner Ventures: The Girl Next Door
Kirsten Green thought her venture career was over before it started in 2004, when she left her job at Montgomery Securities.
Green then convinced some of her old investment banking pals to join her in backing an intriguing ecommerce startup. The company promptly crashed and burned. A distraught Green thought nobody would ever trust her again.
“I cried and cried,” she says. “It was hard and humbling to fail that way. But it was also educational. I was determined to become a better investor.”
Green dreamed of one day launching her own retail-focused venture capital fund. But with no real experience to speak of and one failure to her name already, the odds seemed insurmountable. Instead of giving up, Green spent the next six years learning everything she could about ecommerce companies and the entrepreneurs in the space.
She networked like crazy, taking meeting after meeting. Some of those conversations led to consulting gigs where she helped startups build business plans and pitch decks. She loved the work so much, she sometimes did it for free.
“After a while, I developed a feel for the good startups,” Green says.
So she summoned her courage once again and starting putting small amounts of her own money into certain deals. She also syndicated a number of deals, coaxing other investors into the mix. A few of those early investments, including Serena & Lily and Warby Parker, are now some of the hottest companies in the digital retail space.
Serena & Lily, which focuses on bath, bedding and décor, raised a major round from Battery Ventures. And Warby Parker, which specializes in trendy eyewear, recently closed a new $36.8 million financing led by General Catalyst Partners.
“I met the Warby guys when they were in business school and all they had was a PowerPoint presentation,” Green says. “I wish I was more established so I could have romanced them harder and put more money in.”
Green was followed up on these early achievements. By 2010, ecommerce startups were being taken seriously again thanks to the breakout success of private shopping sites Gilt Groupe and One Kings Lane. Seizing the moment, Green cobbled together a $5 million fund from a handful of individual investors.
But if she ever wanted to become a real player on the venture scene, Green knew she’d have to go bigger. In February, she set about raising a $40 million institutional fund called Forerunner Ventures.
“I needed to get some foundations, endowments, funds of funds, and strategic partners on board, because that is how you build a venture firm for longevity,” she says.
Green did her homework and exclusively targeted LPs who had shown an interest in the microVC trend. The good news was that it was an identifiable universe. The bad news was that it was a very short list of candidates, so he had to make every conversation count. In the end, her track record over the past eight years and her overflowing passion for the retail sector spoke for itself. She raised the fund in just six months. Green won’t reveal her LPs, but says her lead investor is a large endowment.
Forerunner has participated in several deals already, including Dollar Shave Club, a Web-based subscription business for disposable razor blades, and Pickwick & Weller, an online retailer of luxury basics like T-shirts. Also in the portfolio are ecommerce notables Birchbox and Bonobo. The firm plans to invest between $250,000 and $500,000 in about 25 companies.
Green says she was able to get into many of the sector’s hottest deals because she works hard and she plays well with others.
“She is like Switzerland,” says Brian O’Malley, a partner at Battery Ventures, who has co-invested with Green in a handful of deals. “People love partnering with her. Battery might be competing with another firm on a deal, but no matter who wins, Kristen always gets slotted in. Either way, she gets included in the deal.”
Forerunner is clearly benefiting from the tailwind in ecommerce. But what happens a year or two down the road, when the space is suddenly not so hot anymore? Green admits that’s a legitimate concern.
“We have to be really smart about how we build this business,” she says. Though her real love is digital commerce startups, she has expanded her purview to include enabling technologies such as mobile payments and data analytics for retailers.
“I want to make sure we know enough about other business models that we can move in those categories in a more meaningful way at the right time,” she says. “The last thing I want to be is a one-fund wonder.”
Brooklyn Bridge Ventures: The Overachiever
It may be presumptuous for a 33-year-old New Yorker with a failed startup under his belt to think he can create the next great venture firm. Not if you’re Charlie O’Donnell.
In fairness, O’Donnell also has a few successful venture investments to go with that that failed startup. Still, don’t tell O’Donnell he can’t do something, because he’ll likely prove you wrong. His philosophy on life is simple: “Half the battle is just showing up.”
Like the time in 2005 when he wanted to break into the venture industry. He had little experience and lacked the requisite MBA from Stanford, Harvard or Wharton. But that didn’t stop him from emailing Fred Wilson at Union Square Ventures and asking what a VC analyst does. Wilson saw something in O’Donnell and offered him a job.
O’Donnell then caught the entrepreneurial bug himself. He left Union Square after a year-and-a-half to launch his own startup called Path 101. Two years later, the company shut down and he was $32,000 in debt.
He may have lost money, but he did gain unique insight into the New York startup scene. He knew all the major players and they knew him. He even founded a startup networking organization called nextNY.
One person who took notice of O’Donnell was Josh Kopelman, the founder of First Round Capital. He was looking for someone plugged into the New York tech community and invited O’Donnell to join the firm on a temporary basis.
“Josh said I could come there for a year to hang my hat and build up my track record, but I ended up staying for two years,” O’Donnell says.
It was a productive period for O’Donnell. He sourced seven investments in total, two of which had successful exits. GroupMe, a company he discovered at a hackathon, sold to Skype for a reported $85 million last year. And SinglePlatform, a business listings site, was acquired by Constant Contact for $100 million in June.
O’Donnell’s best quality, says Chantel Waterbury, founder of ecommerce site Chloe & Isabel, is that he thinks like an entrepreneur.
“The thing that made me go with First Round and Charlie was that he understood my needs as a first-time founder,” she says. “All the other VCs were asking me about things like international expansion. But how could I think about entering Europe when I didn’t even have office space yet? Charlie really grasped that.”
Buoyed by a string of early hits, O’Donnell left First Round early this year and set about launching his own fund.
“I believe in creating in my own destiny. And, to be honest, I kinda like being the boss,” he says.
Brooklyn Bridge Ventures, the first VC firm located in Brooklyn, has a target of $10 million. So far, O’Donnell has closed on $4.1 million from three institutional investors, including Sigma Ventures and KEC Holdings, as well as individuals, such as Kopelman and Howard Morgan at First Round.
O’Donnell is the first to admit that raising money for a new VC fund is a lot different from raising money for a startup. “It’s actually easier for startups because the people who invest in them make themselves known. They have websites, they’re on AngelList, and they go to hackathons,” he says. “But if you’re looking for institutional LPs or family offices to write a $1 million check, good luck finding them. They’re not online, they’re not on Twitter. It’s a very hidden world.”
Brooklyn Bridge Ventures has made six investments to date. O’Donnell won’t disclose the names of the companies, but says they cover a range of industries including data analytics, sustainable agriculture, and mobile gaming.
Though his investments are not geographically limited to Brooklyn, he believes the firm’s distinct advantage is its ability to tap into the local talent pool. He estimates that about 50% of people who work for venture-backed startups in New York actually live in Brooklyn.
“Startups are desperate for really talented designers and developers,” he says. “We focus on helping our companies make that next great hire.”
After stints at Union Square and First Round, O’Donnell hopes that Brooklyn Bridge is his final stop.
“I want to tell people I’ve worked at the three best VC firms in New York,” he says.
Data Collective: The Cool Kid
It could only happen in Silicon Valley. A group of friends get together to shoot the breeze over a few beers. The next thing you know, they’re launching a venture firm.
Data Collective is probably the only VC firm that ever grew out of a drinking session. Granted, these beer buddies are a bit unique. They include some of the brightest technologist and practitioners in the big data sector.
“We were all friends and we all had this overlapping interest in big data,” says Matt Ocko, a managing partner at the firm. “There was this massive IT transformation happening right in front of us, and we were all hearing about it over beers. So we said, let’s invest together.”
Ocko, who previously worked at VantagePoint Ventures and Softbank Capital, manages the fund along with three partners: angel investor Zachary Bogue; Mike Driscoll, CEO of Metamarkets; and Bradford Cross, CEO of Prismatic.
What’s unique about the firm, however, is that the other 35 members of the drinking group, including up-and-coming data scientist, Fortune 500 CIOs, infrastructure gurus, and seasoned entrepreneurs, are all equity partners who share 50% of the fund’s carry.
“We are not claiming to have discovered the notion of surrounding ourselves with people smarter than us,” Ocko says. “We are just doing something a little different from how it previously worked.”
He notes that all the best venture firms have a network of experts they lean on for advice. But none has ever compensated them quite the way Data Collective does.
“These networks sometimes calcify once the venture firm becomes very successful. It can be hard for folks in the network to feel like first-class citizens,” Ocko says. “They worry if you look at someone the wrong way at a partner meeting you can lose your carry. The only way you can lose your carry here is if you check out on us.”
Every member of the collective makes a small personal investment in the firm. Some members have even contributed as much as $2 million, though that level of commitment is neither required nor expected. “We explicitly do not solicit from the collective,” Ocko says. “We value our partners for their expertise, networks, and good will – not for their money.”
Having this A-list of big data experts at its disposal allows Data Collective to “punch out of our weight class in terms of recruiting, mentorship, product direction, and acquiring that elusive enterprise customer” he says. “Plus, our deal flow is off the charts.”
The identity of collective members is a closely-held secret, but many of the firm’s investment are public knowledge. Portfolio companies include Kaggle with co-investors Khosla Ventures and Index Ventures; Continuuity with Battery Ventures and Andreessen Horowitz; CloudPhysics with Mayfield Fund; and LendUp with Google Ventures and Kleiner Perkins Caufield & Byers.
Part of the firm’s appeal is that they “get it,” says Sasha Orloff, co-founder of LendUp.
“They know how to speak to entrepreneurs and engineers,” he says. “They can vouch for our technology to non-technical investors, they can get us a meeting with people like [California Lt. Governor] Gavin Newsom, and they can introduce us to data scientists from all the major Silicon Valley companies.”
Data Collective launched two years ago with a sub-$10 million fund. The firm is currently in the process of raising its first institutional fund. Ocko won’t comment on fundraising, but industry watchers expect the fund to be somewhere between $50 million and $100 million.
Data Collective has largely operated under the radar, but one major event earlier this year forced the firm to come out of the shadows. Bogue’s wife, Marissa Mayer, was hired as CEO of Yahoo. With the white-hot spotlight on Mayer, Data Collective had to either define itself or risk getting defined by prying tech journalists.
“Zach was described as the co-founder of a stealth venture capital firm,” Ocko says. “So we had to come out and publicly describe what we do. But, honestly, we would have happily remained stealth for the next 10 years.”
Spoken just like the cool kid in class.
Correlation Ventures: The Computer Geek
VCs pride themselves on backing the most innovative companies in the world. Yet the venture industry itself has been very slow to evolve. Until now.
A new firm called Correlation Ventures has the potential to significantly disrupt the staid venture world.
The firm uses computer models to guide its every investment decision. It’s not at all influenced by the typical tools of the VC trade: gut feel and intuition.
Entrepreneurs with a killer pitch, winning personality, and the right connections have no advantage at this firm. “Everything we do is empirical,” says managing partner David Coats, who founded Correlation Ventures with Trevor Kienzle, Grace Chui-Miller, and Anu Pathria.
“It doesn’t matter how entrepreneurs get to us, or if we’ve known them all our lives, we evaluate every deal exactly the same way,” Coats says.
Coats, a 16-year-venture capital veteran with previous stints at Hamilton BioVentures and Windamere Venture Partners, admits that one of the greatest challenges is turning off his venture brain and resisting the temptation to pick companies himself, rather than letting computers do all the work.
But when you’ve spent the past seven years meticulously building one of the world’s most complete databases of venture deals, covering nearly all U.S. venture investments over the last 20 years, you can’t let personal bias get in the way of big data.
The Correlation team runs every deal through the database and assigns a score based on a number of key metrics, such as terms of the investment, history of exits in that particular industry segment, and other investors involved in the deal.
The firm uses this information to create a predictive model for making smarter investment decisions, Coats says. “We are trying to tilt the odds a little in our favor for each investment. Over a large portfolio, we believe our fund will perform well.”
Coats is not under the illusion that machines and algorithms can replace flesh and blood investors, nor that Correlation will change the face of the venture industry.
“The human element is always necessary,” he says. But Correlation believes it can fix some of the traditional problems in the industry.
Take board seats, for instance. Correlation discovered that companies with more than two VCs on the board are more likely to fail. As a result, the firm never takes board seats and never leads deals. Instead, it co-invests alongside other VCs looking for syndicate partners.
The firm moves extremely quickly. All deals are run through the Correlation engine within 48 hours of reaching the firm. If all goes well, it writes a check within two weeks and can invest up to $4 million over the life of the company. The firm plans to make up to two investments per month, or somewhere between 75 to 100 investments over the life of the $165 million fund. It has a very broad mandate, with the ability to invest in any sector and any round, from seed stage to growth.
Naturally, some skeptics in the industry write off Correlation as a mere gimmick. But others love the concept. Perhaps that’s why 30 VCs invested their own money in the fund.
“It’s not every day that something comes along in venture that really is a game changing model,” says Michael Powell, a general partner at Sofinnova Ventures, who is not an investor. “They are going to nail this.”
Other LPs in the inaugural fund, which closed in November 2011, include endowments like UTIMCO, pension funds, and large family offices. Coats admits that LP reaction to the fund could have gone either way, given that the firm’s approach is so novel and untested.
“Sometimes it’s tough to back a new fund,” he says. “But on the other hand, LPs are looking for something different.” Leave it to the computer geeks to reboot the venture world.
Tom Stein is a Palo Alto, Calif.-based contributor. He can be reached at firstname.lastname@example.org.