Tusk Venture Partners shows how to leverage a tough first fund into a larger second

The New York firm, which focuses on investing in companies operating in highly regulated markets, closed Fund II with $70m. It reports Fund I has an early net IRR of 64.6%.

Raising capital is not easy, says Jordan Nof, managing partner of Tusk Venture Partners.

The New York firm in December announced the close of its second fund at $70 million, nearly double its debut effort, which raised $36 million in 2017.

But Nof wasn’t necessarily talking about the difficulty of wrapping up Fund II.

In a conversation recently with Venture Capital Journal, Nof reminisced about the difficulty in raising Fund I, which he called a humbling process. “One of our strengths, which was difficult to convey, was our differentiation in understanding regulatory risk and helping companies navigate that risk,” says Nof, who adds that a VC firm helping startups navigate a regulatory landscape was new to LPs.

Here’s how Tusk Venture Partners went from idea and differentiation to closing a larger second fund.

From Uber advisor to VC

The venture firm Tusk Venture Partners was founded in 2015 by political consultant Bradley Tusk and Nof, a venture investor, to invest in companies creating new verticals and entering highly regulated markets. Early in the decade, Tusk advised Uber and entrepreneur Travis Kalanick during the formative years of the ride-hailing company to help deal with New York City’s taxi regulations. Tusk received equity shares in exchange for its advisory services with Uber.

Nof and Tusk decided to launch Tusk Venture Partners when most tech companies didn’t consider how politics or regulation impacted their business. It seemed obvious to the firm founders that a venture fund should be created to invest in regulated markets. They then began raising its inaugural fund.

Nof, who was previously a director at The Blackstone Group before partnering with Tusk in 2015, says his new firm didn’t have fundraising experience. But he says they had conviction in themselves and their thesis.

The idea behind the venture fund was based on the notion that startups raising capital and trying to break the status quo in their industry would face regulatory hurdles, much like Uber. “We understood regulatory risk and knew we could help our portfolio companies navigate that risk,” Nof says.

Tusk and Nof say raising their first fund was difficult. They said they spent months in meetings and received the response of “no” for every reason imaginable, Nof recalls.

Developing relationships with institutional investors takes time, Nof adds.

“You need to be willing to commit the time and energy to begin cultivating those relationships early,” he says. “Depending on the investor, it could take more than a single fundraising cycle to get there. However, going back to those investors and showing them that you did what you said you were going to do, when you first pitched them, goes a very long way.”

Eventually, an LP agreed to invest as the anchor in Fund I. Nof wouldn’t identify firm backers, but says the anchor LP is a large insurance company in New York.

The anchor put up about 25 percent of the first fund. Then a few others followed suit and by late 2017, 18 months after the firm began fundraising, Tusk Venture Partners held a final close. Additional backers include endowments, foundations, fund of funds, family offices and high-net-worth individuals.

With the anchor investor, getting from the first meeting to commitment took months, several meetings, and going through a robust diligence process, Nof recalls.

“However, it was well worth the time and effort,” he says. “Our anchor served as a catalyst in helping to drive the first close of TVP I and gave us a lot of momentum. But [the length of time to raise Fund I] will always serve as a humbling reminder of how we got started.”

Soon after the close of the first fund, the anchor agreed to back the next vehicle before Fund II documents were even drafted.

While many emerging managers may not pursue an institutional investor until their second or third funds are proved out, for Tusk Venture Partners, getting an institutional anchor investor for its debut fund was part of the fundraising strategy from the outset, Nof says.

Harkening back to Fund I, Nof says that each LP is different. Some look for concentrated portfolios, while others prefer a more diversified approach. Some look to exclusively invest in smaller funds, while others will only consider funds above a certain size.

“It’s important to remember that sometimes there simply might not be a good GP/LP fit,” he says. “As a GP, you are responsible for setting the strategy and executing on that mandate.”

For emerging managers, he also advises: “Have conviction in your strategy, acknowledge when its likely not a great fit, and focus your time and energy on other investors in your pipeline.”

Fund I performance

The firm’s first fund has backed 18 companies, including Lemonade, Bird, Ro, Care/Of, Lyric and Kodiak. A few of those companies have obvious regulatory hurdles that Tusk has helped advise on.

Bird, for instance, is aiming to launch electric-powered scooters in cities nationwide. The property and casualty insurance provider Lemonade is looking to obtain carrier licenses. Roman operates as a telemedicine provider and is navigating the healthcare regulatory framework. Kodiak develops systems to allow trucks to drive highways autonomously.

The firm says that early results from its first fund speak for themselves. Its net IRR as of the third quarter last year is 64.6 percent, the firm reports in a Medium post in December announcing its Fund II close. “We don’t follow the herd,” Nof says in regard to disclosing the fund’s metrics. “We want to be transparent and show the VC ecosystem what we’re about and prove that our model works.”

With its second fund, Tusk Venture Partners is now leading rounds and taking board seats. Already, the firm has invested in seven companies with its sophomore fund. Investments include Sunday, backed by Tusk and Forerunner Ventures, which sells non-toxic lawn care ingredients direct to consumers; and Boulder Care, which operates a digital health platform to treat opiate use and has raised funding from Tusk and First Round Capital.

Nof says the firm is looking to go deeper into such sectors as digital health, autonomous trucking and the electrical grid.

As for Fund II, Nof says raising it wasn’t as difficult as the first fund, but he wouldn’t call it easy. He says the firm is fortunate to have an LP base that continues supporting its unique vision.

“To raise a second fund significantly larger than the first, you need to demonstrate how the additional capital might change your investment strategy, how you plan on scaling your team and infrastructure, and why you are uniquely positioned to execute the strategy and drive returns to your LPs,” he says. “Scalability and repeatability become new questions to answer and prove out.”

Tusk Venture Partners

http://tusk.vc

Firm: Tusk Venture Partners, an independent business that sits alongside the political and regulatory consulting practice, Tusk Strategies.

Personnel: Led by Managing Partners Bradley Tusk and Jordan Nof.

Differentiation: Invests capital and provides political expertise to help startups navigate regulated markets.

Funds: Fund I Raised $36 million in late 2017. Fund II raised $70 million in December 2019.

LPs: Mostly institutional, including insurance companies, endowments, fund of funds, family offices and high-net-worth individuals.

Portfolio: Bird, Lemonade, Coinbase, Roman, FanDuel, Nexar, Sunday Lawn, Care/Of, Boulder Care, Enzyme Health and Kodiak.

Fund I Performance: As of Q3 2019:

  • Net IRR: 64.6%
  • TVPI: 2.3x
  • DPI: 0.2x
  • RVPI: 2.1x