OATV Fund III

Last week we quietly closed our third OATV fund. We capped it $85M making it our largest to date.

Generally we keep these closing quiet, but given the word has leaked I thought I’d take a moment to put down some thoughts on our development as a firm and some of the thinking that went into the new fund.

Firstly, wow! With all of the turmoil in startupland and the world of venture fund raising we feel extremely fortunate to have been able to raise this new fund and to have done it in such a short amount of time.

When we set out to raise our first fund in 2005, we began a nearly two year journey involving enormous amounts of educating the market on what a seed fund was and why we felt there was such a compelling opportunity to build a new firm solely focused on this breed of cash efficient startups that make our model work. Over the course of those two years nearly every ounce of faith in ourselves and our story was pushed to their very limits.

Since that first fund  super angels have sprouted wings, accelerators have been, um, accelerating company formation and incubators have stopped being a 4 letter word.  We’ve been deeply fortunate to have been able to catch the seed stage wave early and work with some of the most dynamic and thoughtful founders in our industry. Their hard work and vision have allowed our funds to perform quite well in relation to our peers and enabled us to have far more interest in our new fund than we were able to accomodate.

Now, when most of our peers in the venture business announce a new fund they generally stress that nothing has changed and it’s business as usual (the Foundry guys even go so far as to use the same blog post). For us, much of that is true. We will continue to focus on the earliest seed stages, but there have been some changes in the market since we closed that first fund that we wanted to position ourselves to meet and amplify with a larger fund this time around.

First, a technicality. Our first fund was invested over the course of 4 years. Our second fund was invested in  just under 2.5 years. To us, 2.5 years felt too fast and 4 years felt too slow. Given how quickly we’re seeing startup bubblettes emerge, we decided to raise a little more cash now to provide for greater time diversity within the portfolio.

Second, and more importantly, the seed landscape has changed dramatically since 2005. So many more companies are getting created and raising small amounts of capital to derisk themselves and validate, or disprove, many of their original assumptions. That said, we’ve seen a parallel trend wherein the vast majority of LP capital is being consolidated to a handful of the top firms who’s bar for follow on financing is incredibly high. This has created a dynamic I’ve described in the past as an Island of Misfit Toys- companies who’ve made progress but not quite enough to clear the hurdle for what has now become the new Series A ($5-$10M).

As a seed investor, we’ve always leaned towards larger rounds in favor of giving our founders at least 18 mo of runway with no revenue. To date, this means our largest check size was $1M (average check size has been around $700k) and our seed round sizes tended towards $1.5- $2M total. With the new fund we’ll be able to provide a select few companies who’ve taken seed rounds of funding with what would have been considered a Series A round, when I came into the business, of $2-$4M. In several cases these rounds will allow companies to easily clear the hurdles of more traditional venture capital firms. But, we also hope that a few of these rounds will be the last check some of our founders will need to take. 

Finally, we decided to raise a little more because we like investing in things that may be  unobvious at first. As a firm, we’ve generally been attracted to things that are a little left of center, be it geographic markets or emergent trends, and that has served us well. We’re very open to investing with our conviction wherever and whenever we’ve been struck and we like that. Our LPs like that too and want to see us doing more of it. So, with a little larger checkbook we’ll be able to continue to spot and invest in trends that may take a little longer to make their way into the mainstream. 

So, that’s it.

I can’t convey how grateful we are to the founders we’ve been fortunate to work with and to the LPs who believed in us when most of their peers didn’t. We’ve had a good track record of proving our doubters wrong and, with this new fund, we hope to continue that trend.

***personal note- it’s my site, so I can do this right?

When we started OATV in 2005 I had never worked with Mark or Tim before. It’s been one of the great blessing of my life to have worked shoulder to shoulder with such great people who’ve shaped me in more ways than they know. I am fortunate to call them Partners and friends.

Onward.