One decade in, Homebrew says it’s becoming self-funded

Homebrew has a new cup of tea (or coffee, or beer, or beverage of your choosing).

The venture capital firm is leaving its strictly seed-stage roots — and its traditional venture structure — and pursuing a more stage-agnostic evergreen model that is funded solely by Satya Patel and Hunter Walk, Homebrew’s general partners.

“When we sat down together in 2021 to plan for Homebrew’s future, the most obvious choice was raising a larger fund with even more capital to invest since that’s the way the industry has moved,” co-founders Hunter Walk and Satya Patel wrote earlier today in a blog post. “But we never started Homebrew to be capital accumulators and have never optimized for assets under management as a business model.”

With it’s new evergreen approach, Homebrew will have an open-ended fund structure with no termination date. The strategy should also allow the co-founders to recycle capital from realized returns without constraints. Asked for more specifics about how much the team plans to put to work and the size checks it intends to write, Walk said that there’s no fixed amount of capital that Homebrew intends to deploy and suggested that while he’s uncomfortable sharing a specific investing range, Homebrew will be making a “meaningful commitment, at least for us,” when it invests in startups.

Homebrew’s pivot is happening at a crucial market moment for tech startups. Public tech stocks are being hammered regardless of sector. And while early-stage private startups seemingly remain largely unscathed, owing to an influx of venture capital, later-stage companies are finding themselves in a tougher position right now, with deep-pocketed investors like Tiger Global and D1 Capital reportedly backing away from the megadeals for which they’ve become known and flocking instead to younger and less mature companies, according to The Information.

It’s a notable shift for Homebrew, which has stakes in companies such as Winnie, Stir, Mercury and Plaid. Since inception, Homebrew has closed three core funds and two overage funds to support breakaway winners in its core funds. The change also comes at a natural point for the firm, which is no longer making new investments out of Fund 3.

The move is also notable in a market where raising larger and larger (and larger) funds has become routine. Of course, the perennial challenge that comes when raising more capital is that an investor then has more pressure to deliver on those outcomes. You may have been able to provide outcomes at a 5x rate on a $15 million fund, but can you still hit venture-like targets when you ask them to back a $150 million fund? What about $1.5 billion?

Walk, in an e-mail, told TechCrunch that their return target isn’t changing from “what a good early stage fund should strive far” sticking to shooting for 5x.

Homebrew isn’t the first evergreen fund and it won’t be the last. One reason why more seed-stage focused investment firms may choose the same path is that it alleviates the pressure a firm may feel to be in constant fundraising mode. It also allows investors to take their time; with a traditional venture capital fund, the clock starts ticking when a fund is raised and it’s expected that investors will put the money to work in a relatively short amount of time, no matter the market conditions.

There are downsides to evergreen funds, however, including unstable cash flows, confusion from co-investors and potential impact from illiquidity, per TopTal. In other words, by continuing a fund indefinitely a team may enjoy more flexibility with less pressure to exit but face other challenges.

Either way, it’s becoming more difficult for smaller firms to raise subsequent funds, per analyst sources in the venture industry. As an investor, the best way to de-risk your next fund might be to not raise in a traditional way at all.

Walk says that “capital was not the limiting factor here” when considering the change in strategy.

“Our LPs told us they were happy to experiment with us and would be happy to be a part of whatever Homebrew evolves to,” Walk said in an email. “So, [they are] a little disappointed maybe but overall happy and eager for us to experiment. And to be in business together.”

He continued on to write that there will be “different ways” that Homebrew will work with the limited partner base in the future, and that he and Patel are keeping LPs updated on the new fund’s investments.