CrossCut Ventures, a Los Angeles-based seed investment firm has just closed its fourth (and largest) fund with $125 million in new cash.
It’s been a long road for the firm’s three co-founders, who have been investing in Los Angeles since 1997. In that time they’ve seen the city’s technology scene evolve in fits and starts, but now, with companies like Snap, Dollar Shave Club and Oculus bringing billions of dollars down from Silicon Valley, a wave of investor interest has followed — and with their new fund they stand to reap the benefits.
“We’ve been looking for that since 2008,” which is when the firm launched its first institutional investment vehicle, says Brian Garrett, a co-founder and managing director at CrossCut. “we are now in a place where those tentpole companies, like Snap, and Oculus, and Dollar Shave Club… we can build those companies here.”
Indeed, the seed stage investor has already had success with its previous investment vehicles, which have put $50 million in capital to work behind 70 companies that have raised $1.3 billion in follow-on funding. And 66% of those investments were made in companies based in Los Angeles.
“Los Angeles is capturing the attention of institutional LPs, which is leading to the virtuous cycle of innovation. Tech companies have hired thousands of people and brought a ton of talent down here and those people will go off and start their own businesses,” Garrett says.
Indeed, CrossCut had set out to raise only $100 million, but there was so much interest from limited partners — the funds that back venture firms — that the venture firm hit its hard cap for fundraising at $125 million.
The firm has certainly come a long way from the $5 million it raised for its first vehicle in the dog days of 2008 as the global financial crisis was taking its toll on economies around the world.
From that small, first fund, things grew slowly and steadily for the partners at CrossCut, Garrett said. The firm’s second fund, raised in mid-2012, was a modest $16 million, and it raised a significantly larger fund in 2014 as the Los Angeles market as it exists now was beginning to take shape.
The increasing investment pools in some senses mirror the pace of acceleration of the Los Angeles ecosystem, but in those early days, the CrossCut founder said things were not necessarily that rosy.
“Here’s the story,” says Garrett. “[CrossCut co-founder] Rick Smith and I left cushy venture jobs to start Crosscut… I had no savings and bought a new house in the Pallisades with a big mortgage.” Then the bottom fell out of the economy.
“There wasn’t a fee stream coming off the fund,” Garrett said. “I was consulting with anyone who would help me around strategy and business development… and got pulled in with a public company turnaround… a lot of what we were trying to do was replicate venture models in Brazil.”
The company was called Que Pasa and Garrett helped it raise an $11 million PIPE. That deal, ultimately led to an acquisition.
Meanwhile, another CrossCut co-founder, Brett Brewer had gone to a company in Kansas City called AdKnowledge. While still working with CrossCut, Brewer helped AdKnowledge raise $40 million from TCV and scaled the business to $300 million in revenue, Garrett told me.
“We were the largest seed fund in LA at the time at $5 million we were running this thing out of coffee beans on nights and weekends,” Garrett said.
In fact, the firm’s latest addition as partner, Clinton Foy, actually began at CrossCut as an unpaid venture partner back in 2014. “We brought him in as a partner ahead of fund three not even sure we were going to raise fund three. Foy has brought eSports, gaming, and mobile streaming experience to the partnership — and has already scored a pretty big win as the co-founder of the Immortals e-sports team.
The first fund has now returned 4 times its money from 18 investments — 11 of which netted positive returns. And the firm’s second fund is one-third returned with a paper valuation at nearly 5 times its money, given the fair market value write ups of the deals in the portfolio, Garrett said.
There are currently 32 companies in the portfolio and 12 of those investments were made in the last year.
Typical check size for the new CrossCut fund will be potentially as much as half of a $2.5 million to $3.5 million dollar round, but the firm doesn’t want to stray too far from traditional early stage seed investing, according to Garrett. However, at nearly two times larger than any other seed fund in town, the firm has a bit more dry powder.
As with previous vehicles, the fund will primarily look to invest in Los Angeles and Southern California, but it will look elsewhere too — as long as the potential investment has some need to tap the Los Angeles market, the firm is interested in taking a look.
Los Angeles, could, however, occupy a more central place in the investment thesis given the activity from startups that exists here.
Indeed, the appearance of new investment firms coming in at later rounds have made the city’s venture scene more robust, and brought a new attention to the companies coming out of LA.
Investors like Mark Suster at Upfront Ventures have been beating the drum for Los Angeles as an epicenter for technology investment for a number of years. Through the Upfront Summit, which his firm launched a few years ago, Los Angeles investors and entrepreneurs have had a marquee showcase to pitch all of the things that Los Angeles can offer to a tech company — and the opportunity that exists for investors, Garrett said.
But Upfront, which has been in Los Angeles since 1996, and other investment firms like Greycroft Partners, which established themselves in Los Angeles more recently (and, in the case of Greycroft, have offices in other geographies from which to commit capital) have managed to provide the later stage capital that was the oxygen the local ecosystem needed.
For Garrett, the presence of a broader investment base is great for a firm like his, which need later stage investors to fund their portfolio companies past a Series A round (which is the time that CrossCut will tap out to let other investors lead).
“What happened is that the ecosystem believed that there were next generation businesses to be built,” said Garrett. “For us it was Ophir [Tanz] at GumGum and Jason [Nazar] at DocStoc and David Lee.”
That was around 2008 to 2011, right before Upfront Ventures began to really publicize Los Angeles as the hot new place to go for tech startups, according to Garrett. “I will fully then say that Mark Suster created a lot of awareness and a megaphone and a spotlight that got shone and we have been a great beneficiary of his outward efforts,” he said.
These days, the firm’s investment interests are as diverse as the Los Angeles ecosystem it supports running the gamut from artificial intelligence, to blockchain technologies, to gaming and eSports. The firm has also backed companies in automation, “big data”, digital marketplaces, and software as a service.
“I was CrossCut’s very first investment as they formed the fund back in 2008. It’s been amazing to watch their success and growth. They have quietly and humbly built one of the best reputations in VC by working tirelessly on behalf of their portfolio companies.” says Jason Nazar, founder of DocStoc (sold to Intuit) and now a co-founder of Comparably. “They deserve a lot of credit for catalyzing this ecosystem and were the first to recognize the opportunity and build a fund and brand around it.”
At this point, for CrossCut and Los Angeles, the important thing is the solid foundation on which new startups are being built. “It’s a perfect storm of a lot of factors,” said Garrett, but the Los Angeles tech scene now has grown and “contributes to this idea that tis will not be a hyped and busted ecosystem.”
Companies like Tesla and SpaceX have reinvigorated Los Angeles manufacturing, aerospace, and automotive industries, while young data scientists from the University of Southern California are doing amazing work around big data, Garrett said.
“It’s a ten year story arc, right now there’s no branded money down here that is being built to catalyze innovation that has the ability to build a viable standalone investment firm in Southern California.” That’s an opportunity for a firm like CrossCut, with its new capitalization, to stake a pretty large claim for itself in a tech ecosystem that is still developing.