Upfront Ventures Raised New $280 Million Fund

Whew!

We’ve been dying to tell you all for a while that we had raised a new venture capital fund and of course given SEC filing requirements the story was somewhat already scooped by the always-in-the-know Dan Primack a few weeks ago.

We raised $280 million. Our last fund was $200 million but as you may already know since we raised that fund we added new partners Greg Bettinelli and Kara Nortman and Venture Partner Hamet Watt — all of whom are busy looking at new deals for the firm in addition to Yves Sisteron (the founder), Steven Dietz (also part of founding team) and myself.

The speaks to the continued confidence in the venture capital markets and as I had predicted some time ago the VC markets right now are a great place to invest — especially relative to other places to put one’s money. I knew eventually people would realize that the Kauffman Report and all the talk of VC returns were rear-view mirror analyses. If you want to understand how the VC industry is changing there is a great primer in the link.

Wait, didn’t you just raise a fund?

Well. Our last fund we raised was in 2012 and we began investing it in April of 2012. In case you didn’t know, many VCs target a 3-year investment horizon for a fund and after that the fund mostly does only follow-on investments in companies in that portfolio. That’s why the best firms tend to raise every three years. Our 3rd fund began investing in March 2009 (raised in 2008) and our 4th fund started in April 2012 so this fund will naturally begin investing around March / April 2015. We feel like we’ve gotten ourselves into a really good rhythm.

Will our strategy change now that we have 40% more capital?

No. Whereas we had four partners investing Fund IV we now have six partners actively looking at deals for Fund V. We also promoted Jordan Hudson to principal in 2014 and have encouraged him to begin looking at deals.

Our investment strategy has always been to do predominantly Series Seed & A round deals, which makes up > 85% of our first investments. We do reserve part of the fund to opportunistically get involved with some B-round deals.

Geographically our strategy is to fund about 50% of our deals in Southern California (from San Diego to Santa Barbara) and 50% of our deals on a national basis. Given where most deals are this has historically meant NYC and San Francisco but over the years we’ve had big successes in Chicago, Baltimore, Las Vegas and London so we’re open to just finding the best deals.

Was it hard to raise the fund?

It’s always hard raising money. As I like to say when asked, “For entrepreneurs you generally need to go to 2–3 cities max and probably pitch 5–15 investors. VCs need to go to 20 cities and pitch one firm in each location!” Well, ok, that’s an exaggeration. You can usually find 2–3 investors per location but it’s not uncommon to see VCs in: Boston, NY, Connecticut, Philadelphia, Pittsburgh, Chicago, St. Louis, South Bend, Austin, Houston, and so forth. And that’s usually just 2 weeks worth of travel!

And when VCs look to fund startups they know that if they miss a deal that deal is highly unlikely to come back if they raise funds from another firm so you have a rather binary decision. Yet many VCs must come back to raise funds every three years and until you are in the “top tier” status and become over-subscribed most LPs know that they can pass now and look again in 3 years. Many early VCs (Funds I-III) raise in 4-year cycles or longer because it often takes time to prove your investment strategy is working.

When you raise money from a VC if they say yes you are usually done or perhaps need one other firm to commit to close your round. But that’s it. When you’re raising money from LPs you often need 20–25 firms to say yes and usually all around the same time and figure a way to get them to commit to the right size checks so that it all fits into the size fund you’re raising.

So, yes, it’s hard.

But on a relative basis we feel blessed. Whereas the first two funds I was involved in helping raise each took more than a year this fund was less than 6 months. I think that’s in part due to market conditions being favorable to venture capital and in part it’s due to the significant uptick in Los Angeles as a major tech hub in the US. It goes without saying that the shortening in time also was due to performance. In recent years we’ve had big wins across all of our long term partners (Yves: Envestnet), (Steven: TrueCar), (Me: Maker Studios).

Who gave you the money?

For some reason that I haven’t yet figured out, Limited Partners seems to be pretty confidential about which firms they’ve invest in. Or perhaps VCs like to carefully guard who has bankrolled them so as not to attract competition? I don’t know. I sort of prefer transparency but I’ll honor the wishes of our LPs unless any of them tell us they’re ok with us disclosing the relationship. But for people not familiar with VC I can tell you it’s a mix of:

1. University Endowments
2. Foundations
3. Family Offices (of high-net-worth individuals or families)
4. Insurance Companies
5. Banks
6. Corporate Investors
7. Fund of Funds (people who raise money from large funds and then break it up to invest into VCs and other asset classes)

Some funds also raise money from public pension funds or sovereign wealth funds.

Why do they invest in venture capital? Anybody who has a large pool of capital will divide it into many different asset classes to diversify risks and returns. So they will have allocations to US public equities, international public equities, emerging market public equities, real estate, mining, minerals and so forth. One slice of the pie is usually for “illiquid assets” or sometimes called “alternatives” which includes hedge funds, private equity / buyouts and venture capital.

Investing is about diversifying investment types so when some factors in a market go well and others go poorly you hedge your risk across assets.

What next?

Just like with entrepreneurs — you know that raising money is just the start. We’re signing on to deliver against the performance expectations of our LPs for many years to come and we don’t take the trust they have placed in us lightly. We believe the investors who committed to our 2009 and 2012 will end up very pleased because we really like the portfolio of companies we have invested in across these two funds.

But.

In 2015 we go back to square one and start to build a brand new portfolio. It’s exciting. And daunting. And we feel honored to be entrusted to invest other people’s money (and our own) into the many exciting startups that we encounter. And we feel grateful to all of the entrepreneurs who have let us share their journeys over the last decade and the many that will work with us in the years ahead.

Many people have helped us along the way with guidance, mentorship, introductions and advice. Nobody achieves anything like this alone. We will reach out to your directly with our notes of gratitude. But thank you.