Top new venture franchises begin to emerge: VCJ

Emerging venture managers trying to raise capital in the aftermath of the 2008 credit crisis encountered a higher-than-usual rejection rate.

Today, however, many limited partners who turned them down are wishing they’d done otherwise.

With stock indexes near double their crisis lows, IPO demand enduring, and late-stage valuations running high, many managers who scaled up during lean times are posting impressive early performance.

Overall, the 2008, 2009, and 2010 vintages are shaping up nicely for emerging managers, particularly early-stage VCs. Even a few funds of more recent vintages are posting breakout returns, boosted by high valuations for developers of popular consumer apps.

“You’re in a part of the cycle that, since 2008, has only been up for early-stage investors,” said Roland Reynolds, who manages an Industry Ventures fund-of-funds focused on small and mid-sized venture funds.

(Related Video: Inside the minds of active VC fund investors: Industry Ventures’ Roland Reynolds and three other LPs explain why they’re bullish about venture capital and what they’re looking for in new funds.)

That’s a contrast to past periods, such as 2003 and 2004, when funds focused on Series B and Series C stage deals were more in vogue. These days, it’s the early-stage market that’s generating the most excitement.

With one or two exceptions, it’s probably too soon to pinpoint who are the next-generation of great venture franchises among firms that came of age in the aftermath of the credit crisis. But it’s not too soon to take stock of who’s in the lead.

Much of the early success stems from the so-called unicorn club, venture-backed companies that have reached valuations of $1 billion or more in roughly two to four years.

Emerging managers who’ve corralled a unicorn or two in their portfolios have also captured the attention of LPs looking to identify the next great venture franchises. Newer firms on the watch list include:

• Thrive Capital, which invested early in Instagram, which Facebook bought for $1 billion;
• K9 Ventures, an early backer of mobile app programming platform developer Twilio and ride-sharing app Lyft, which in April raised about $250 million at a $1 billion valuation; and
• Formation 8, an investor in virtual reality headset maker Oculus VR, which sold to Facebook this year for $2 billion.

Many of the successful managers which raised initial institutional funds in the past five years have also done exceptionally well, such as Andreessen Horowitz, which launched in 2009 and is a household name in startup tech community.

Other relatively new firms that have climbed their way to the top tier, such as Union Square Ventures, Spark Capital, First Round and Foundry Group, started in the days when Lehman Brothers was a top investment bank and George W. Bush occupied the Oval Office.

The newer generation of up-and-comers has fewer fully realized exits. With a few exceptions, such as Instagram and Oculus, the biggest drivers of IRRs are still-private startups, such as Airbnb, Uber, Pinterest and Twilio. Early backers have had the opportunity to cash out some shares through secondary transactions, but according to Reynolds, investors typically sell just 10 percent to 20 percent of their stake in these rounds.

This story first appeared in Reuters Venture Capital Journal. Subscribers can read the original story here. To subscribe to VCJ and other venture-related research products, click here for the Marketplace.

Photo illustration of emerging butterfly from Shutterstock.