Formation 8 wants to bring venture capital back to its roots: investing in solutions to hard technology problems that could change the world. It just raised its first fund of $448 million — but with a twist. Formation 8 plans to draw on its extensive network and local offices in Asia to win its portfolio of smart enterprise and energy technology companies’ huge deals with conglomerates in the region.
Specifically, Formation 8 is looking for “smart enterprise” startups that can help enormous companies like those that define Asia to make sense of the vast seas of data now available. Government, finance, healthcare, and business services can all fall within this net. Formation 8 also seeks energy companies that can transform the global energy value chain. It hopes startups can become platforms to maximize scalability and take advantage of the nimbleness their small size affords.
Formation 8 co-founder and partner Joe Lonsdale tells me his fund isn’t thumbing its nose at consumer markets, saying “It’s not about what’s right or what’s wrong, but about what areas we’re the most passionate about and are the best at.” As for its focus overseas, Lonsdale riffs, “If you have a company that’s trying to transform a big industry, and you’re ignoring Asia, you’re making a mistake.”
Along with Lonsdale who worked at PayPal and co-founded Palantir, Formation 8’s founders include Brian Koo of Harbor Pacific Capital and InnovationHub, James Zhang of Softbank China Venture Capital and BioDiscovery, Tom Baruch of CMEA Capital and Intermolecular, and Jim Kim of GE and Khosla Ventures. Lonsdale will be speaking at TechCrunch Disrupt NY in a couple of weeks.
Formation 8 originally closed the first $200 million of the fund last year, and some strong early investments and success had more limited partners lining up to fill up the full $448 million. Lonsdale tells me those include “founders of PayPal, Palantir, Yahoo, and Yammer, plus Asian conglomerates and some New York institutions. He’s already thinking about the firm’s next fund, which he says will probably be around the same size. Why raise $448 million instead of a nice round number like $450 million? Apparently, it’s a play on the firm’s name. Four hundred forty 8. Get it?
The firm’s investment philosophy centers around “Large, growing and global markets with hard problems that can be solved through technology and partnership.” It wants companies with a strong technology culture that offer long-term equity incentives, make data-driven decisions, dream big, stress discipline, and have the humility to accept advice.
While it invests in startups, Formation 8 recognizes that there are strengths to large corporations, too.
“Corporations have scale, existing relationships, and distribution advantages in large, established industries such as energy, education, healthcare, logistics, financial services, and government services,” Lonsdale writes. “Many Smart Enterprise startups would do well to partner with large corporations that control the data, the knowledge workers, and the distribution channels.”
It’s in forging those partnerships that Formation 8 really differentiates itself. The firm’s local teams in Korea, China, and Singapore can help its portfolio with relationships, sales, deployment and market knowledge. When I asked if corruption would be an issue, Lonsdale admitted some concerns with how the Chinese army mixes with Chinese Internet industries, but says most of Formation 8’s markets like Korea are exceptionally honorable.
While there’s been a recent increase in deals between Silicon Valley and Asia, Lonsdale says the connection will grow, as smart enterprise and energy businesses disrupt the antiquated big company infrastructures developed 20 to 30 years ago by the first enterprise wave. He concludes: “You need really talented engineers that are really good at big data to fix the infrastructure in big industry. Obviously there’s a market for that in the US, but Asia is an even bigger market.”
See Formation 8 partner Joe Lonsdale speak at TechCrunch Disrupt NY on May 1st.