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Upfront Ventures, the Santa Monica-based venture capital firm that invested in Maker Studios, Factual, and TrueCar has just raised a $280 million new investment fund. This new fund is the VC’s fifth since it began and is 40 percent larger than the firm’s last, which was raised less than two years ago. The new pool of investment capital comes as the Los Angeles tech industry continues to heat up and break investment records.
Despite the larger size of its fifth fund, Upfront Ventures partner Mark Suster said in a blog post that the investment firm will keep its strategy the same, focused on Series Seed and A rounds, deals he said historically that make up “85 percent of our first investments.” Upfront will also continue to focus on Southern California, making 50 percent of deals between San Diego and Santa Barbara. The VC will try to make the other 50 percent nationwide: “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,” said Suster.
The larger size of the fund “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,” said Suster. “I knew eventually people would realize that the Kauffman Report and all the talk of VC returns were rear-view mirror analyses.”
Upfront Ventures will likely start investing out of its fifth fund in March or April 2015 said Suster. To help handle the extra investment work Upfront has added new partners Greg Bettinelli and Kara Nortman and venture partner Hamet Watt.
As is Mark Suster’s style, in the blog post he wrote announcing Upfront’s new $280 million fund, he also included a long insightful explanation on the process of raising venture capital:
Raising money is a multi-city, many investor dog and pony show
“It’s always hard raising money,” said Suster. “As I like to say when asked, ‘For entrepreneurs you generally need to go to two to three cities max and probably pitch five to 15 investors. VCs need to go to 20 cities and pitch one firm in each location!’”
Suster admits that’s a bit of an exaggeration as there are multiple VC’s per city, but he said it is 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!”
Raising money, sometimes its 'come back and see me later'
While venture capitalist can’t miss many opportunities to invest in startups, big institutional investors — the people who provide venture capitalists with funds to invest– can afford to play hard to get.
“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 three years,” said Suster. “Many early VCs (Funds I-III) raise in four-year cycles or longer because it often takes time to prove your investment strategy is working.”
Why do LP’s invest in venture capital?
Institutional investors, or Limited Partners, come from a number of different backgrounds including university endowments, foundations, high-net worth individuals, insurance companies, banks corporate investors, funds of funds, public pensions and sovereign wealth funds. Why they invest in venture capital has a lot to do with the returns they are getting from their existing portfolio.
“Anybody who has a large pool of capital will divide it into many different asset classes to diversify risks and returns,” said Suster. “One slice of the pie is usually for ‘illiquid assets’ or sometimes called ‘alternatives’ which includes hedge funds, private equity / buyouts and venture capital.”
Venture capital, and other illiquid assets, are the riskiest assets so those are usually invest in last, after other investment opportunities have been used.
Success brings more success
“Whereas the first two funds I was involved in helping raise each took more than a year this fund was less than six months," said Suster. "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),” said Suster.
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