With the SEC’s new rules allowing startups and venture funds to raise capital publicly, a wave of firms and companies is starting to experiment with the new regulations. Now we’re seeing one of the very first institutional venture capital firms come forward to publicly market its new fund.
ff Venture Capital is publicly fundraising for its third fund, following its second $27 million one, which closed in late 2011. They have a target of $50 to 70 million for the fund and the firm says the majority of this capital is already raised. Their existing portfolio includes Livefyre, Klout and Indiegogo.
Founding partner John Frankel said the old rules prohibiting general solicitation meant that up-and-coming firms had a harder time breaking in against older, more reputed firms that maybe didn’t have as decent a return. Before last month, firms were not allowed to publicly fundraise under legislation that hearkened back to Great Depression era.
“When we look at how capital is raised, particularly by smaller venture capital funds, it’s stuck in the 17th century,” he said in an interview. “It’s one-to-one marketing. In the 21st century, one should be able to do broadcast marketing.”
Frankel says the firm has “consistently generated” a gross IRR, or internal rate of return, of more than 30 percent through its first two funds. ff Venture Capital opened their first fund in 2008 with a $6.3 million fund.
He said that this number comes from both capital returned to investors and mark-to-market methods based on portfolio companies’ most recent rounds. He added that each of the firm’s two previous funds has an IRR of more than 30 percent whether you look at it from a ten, nine-, eight- or seven-year perspective. The firm has seen 10 exits for its portfolio companies so far.
“We’re not concerned about filling out the balance of the round,” Frankel said. “We just decided to make a principled stand and encourage other early stage funds with good returns to step forward and change the way capital is allocated.”
Because of the way fundraising was structured before, “capital has flowed to players with brand and ego, based on tales around pretty much anything other than return on capital (or even return of capital),” he wrote in a blog post published today,
Indeed, the internal rate of return for different firms is kept relatively secret from the public. You can see the returns of certain funds through reports from pension funds like CalPERS, or the California Public Employees’ Retirement System. There are also firms like Cambridge Associates that privately collect data on returns from different venture capital firms to help institutional limited partners decide where and how to invest their capital.
But the majority of this data is kept from public view.
Frankel said that he’s making this move out of the belief that someone has to step forward first and share their returns, to put pressure on the rest of the industry to do so.
He says smaller funds like his often spend too much time fundraising and generate better returns than bigger, brand-name funds.
The new fund, dubbed “ff Rose” closes at the end of November, and is open to only accredited investors. The firm’s overall strategy is to invest very early, when startups maybe have three or four employees.
Frankel said the firm specializes in helping small teams to grow toward 30 to 40-person companies, and then ultimately into very large growth companies. The firm’s portfolio is 40 percent enterprise, with the rest in consumer. About 40 percent of the companies are in New York, and 25 percent are on the West Coast. Frankel added that they’re not that location sensitive, however.
ff Venture Capital joins a vanguard of firms and platforms like AngelList that are pushing the venture industry to be more efficient and transparent. AngelList, for example, recently launched a “Syndicates” leaderboard, which shows how much total capital angels have at their disposal from their broader network of co-investors. (They haven’t pushed people to reveal returns yet, however.)