Seven years ago, when he first approached investors with the idea of creating a fund-of-funds that would invest in seed-stage, or so-called micro VC, funds, they were cool to the idea. In fact, it took Kim — formerly a partner with the venture firm Rustic Canyon Ventures — roughly two years to raise the firm’s $28.5 million debut fund.
Fast-forward, and Kim’s Cendana Capital — which has backed venture firms Forerunner Ventures, SoftTech VC, IA Ventures, Freestyle Capital, K9 Ventures, Bowery Capital and Lerer Hippeau Ventures, among others — just closed on $260 million in fresh capital across a network of five funds.
One vehicle is Cendana’s third and newest fund-of-funds, which works just like that $28.5 million debut fund, except it’s nearly three times as big, with $80 million in commitments.
Kim also raised $35 million to make direct co-investments; a $60 million co-investment fund that he manages on behalf of The University of Texas Investment Management Company; a $75 million fund called Cendana Blackbird that Cendana manages on behalf of an unnamed pension fund (it invests in Cendana’s portfolio funds in cases where it can get a greater allocation); and a $10 million, late-stage fund called Cendana Kendall that’s being managed on behalf of an unnamed family office. (The idea is for Kim to plug the money into one or two breakaway companies in one of his fund managers’ portfolios.)
Altogether, the San Francisco-based outfit now manages around $450 million — which says a lot about how much the market has changed. We talked yesterday with Kim — who runs Cendana with principal Graham Pingree — about that ongoing evolution.
TC: Cendana seems to be an investor in every major micro VC fund out there. How many funds are you involved with?
MK: We have 15 “core” relations, where we’ve invested $8 million to $10 million, then we have a pilot program where we invest $1 million in 8 or 9 groups that we like but we have some lingering questions about their strategy. For example, NextView Ventures in Boston and Mucker Capital in L.A. were part of our pilot program because we didn’t have a high conviction about either the Boston or L.A. ecosystems. Now we do, so they’ve become core.
The hardware investment firms Bolt and Root Ventures also became part of that pilot program, because we had questions about whether seed was the right entry point for hardware investing.
TC: Which is the newest fund to join your pilot portfolio?
MK: Notation Capital in Brooklyn.
TC: Do all “pilots” become “core”?
MK: No. And we’ve ended up not continuing with some core funds as some have evolved from seed-stage to Series A-stage funds, and backing them is not the mandate our LPs gave us, notwithstanding how amazingly they’ve performed for us. I won’t share publicly which those are, though.
TC: Where do you draw the line? So many of your managers are now investing two or three times the amount of their debut funds.
MK: We’re SoftTech’s biggest LP. And SoftTech could have easily raised a $150 million vehicle (when it was last out fundraising). But it realized a seed found should be no larger than $100 million so raised a $100 million seed fund and a separate $50 million opportunity fund. We’re investors in the $100 million piece alone.
TC: So as far as you’re concerned, a fund can’t do seed well with more than $100 million under management. What about ownership stakes? Do you have a strong feeling about how much a manager should own of each company?
MK: We look for those who lead deals. We think ownership is paramount. We want our fund managers to focus on at least 15 percent ownership. So with the average seed fund going from $1 million to $3 million in recent years, to lead that round, you need to write a check for $1.5 million. That’s why these seed funds have gotten bigger.
TC: Do you care how many people are managing money at these seed firms? You see some that have several partners; you have others, like K9 Ventures, that’s run by a solo general partner, Manu Kumar.
MK: We look at it as capital per partner. Lerer Hippeau has four people investing $113 million, so that’s $28 million per partner. We think the ideal range is $25 million to $35 million per partner.
TC: There are so many seed fund investors. How many groups do you think you’ve met with altogether, and do you ever fund firms outside of the U.S.?
MK: Since inception, we’ve talked with around 700 firms, either in person or over the phone.
We haven’t invested internationally. We felt that the ecosystems outside the U.S. were substantially weaker, owing to the lack of available follow-on capital. That was a huge concern in Europe, where for a long time it was basically Accel and Balderton and Index. But now there’s BlueYard Capital in Berlin and Felix Capital and Mosaic Ventures in London. There’s a lot more going on, so we think the ecosystem has gotten better.
TC: You make direct investments in certain companies when you can. For example, you were able to get equity in Dollar Shave Club through Forerunner Ventures, which also provided an introduction to the company when you asked for one. How do these things come together? How do you choose which companies to pursue with so many startups in your managers’ portfolios?
MK: We have a monthly call with fund managers, but we’re also always trading calls or IMing because we have a pretty close relationship with them. And if a fund manager talks about a certain company and keeps mentioning it every month and it becomes clear that it’s tracking well, we’ll ask for an intro to its management team.
TC: Does that ever create a conflict for your fund managers?
MK: We only invest if the fund manager is coming into the same round, and usually they are stretching their reserves to do that; they can’t do full pro rata, which creates an opportunity for us to try and get in.
These are usually very attractive opportunities; we’ve had to fight to get into most of these. But I do think the opportunity set is increasing as these companies bubble up to the Series A and B stages.
TC: Any thoughts on secondary sales and whether seed funds should hang on for the long haul if they have a buzzy company in their portfolio?
MK: There’s definitely an opportunity for managers to sell into these higher-priced rounds. Our advice is if you have a 10x return, consider selling 10 to 20 percent and getting liquidity to investors. And we’ve seen a lot more of that over the last 12 to 24 months.
Seed funds can become hostages in high-valuation companies otherwise. Say the company ends up raising $100 million at a $2 billion valuation. Well, the seed would have been happy to sell, but now the new investor wants 3x from there, so this company has to get to a $6 billion valuation, and a lot of bad things can happen in pursuit of that.
TC: Do you sell before the big exit? I’m guessing you don’t need to worry about so-called signaling risk — or do you?
MK: We really don’t. We could sell into the next round and no one would blink an eye. It’s a negative signal if Sequoia does it. If Cendana does it, no one cares.