A hybrid fund origin story
Part 2 of TBD in the Front Porch Decoder Ring
Scene — mid-2019, and we’ve all moved back to the Triangle and started to explore re-booting Front Porch together. Oldest kids are getting ready to start Kindergarten, but the younger ones are toddlers. None of us have heard of a coronavirus.
Each of us gets approached to invest in a venture capital fund based in North Carolina. We share each opportunity with each other, as usual, and although each opportunity is compelling, we are hesitant to cut sizeable checks ($300K+) into an individual fund, strategy, manager, and investment environment.
Nikin poses an idea: “What if we pooled some money and could invest in all of them?”
(Enter flashing montage backed to ‘80s music with a bunch of research, where we study up on institutional success in venture over the long-term, come up with the hybrid strategy concept, figure out the rules for investing in pooled vehicles, and line up our own capital plus some capital from family and friends, with the first external commit happening at a neighborhood Halloween party in the pouring rain in October 2019).
We ended up with a few anchoring facts on venture investing:
Venture capital is a top performing asset class over the long-term
Dispersion (range of outcomes) in venture is a multiple wider than other assets
Dispersion requires diversification to manage risk and chase upside properly
Institutions succeed in venture by creating investment strategies that are purpose-built for the asset class (and only possible because they are so big)
We also had a few anchoring facts on the Southeast — namely, that the “primordial ooze” in local ecosystems is finally primed and ready due to the hard work over the last decade of founding entrepreneurs who are starting to recycle their capital, research universities, governments, incubators/accelerators, etc.
PLUS! Tons of talented people and companies are moving here (a data point even pre-COVID is the enormous count of Google employees based in New York and the Bay Area that Joe saw apply to Google jobs in Durham), starting a business is easier here, many legacy industries here remain ripe for technological disruption, and the region is starved for capital despite a strong cohort of high-quality early stage companies.
So then we set out to create a pilot fund (Fund 1) to prove a few things:
Creating a vehicle that is purpose-built for venture is possible outside the fancy boardrooms of Ivy League endowments and other big allocators
Pitching long-term relationships can get us into the best funds
Getting into the best funds can help ensure we see the best deals
We felt like we needed to raise $3M in Fund 1 to prove these things and inform our next steps, so once we had $5M in commitments, we hit pause on fundraising and set out to figure what we’d learned and what we wanted to do next.
A few (pleasant) surprises along the way:
Investor appetite for sustainable way to invest in venture was massive
The typical gut punches of venture investing for most investors (angel deal went to zero! this J-Curve is cutting way harder than expected!) far less prevalent
Deal flow WAY better than expected, given many syndicate deals in region
Company quality strong with hot/hidden deals coming our way frequently
Valuations relatively stable and modest, even in the midst of the ZIRP bonanza
With all this in mind, we felt like we were onto something and launched Fund 2 shortly after the close of Fund 1 to prove that the strategy could be scaled up into a $20M vehicle.
Next up? We’ll talk more tactically on how we decide to invest in our fund partners, which now total 30 (and counting!) across both funds.