The crossover fund has finally arrived. Liz Gannes has done a great roundup of the latest trend, with Zynga, Facebook and Groupon taking money from the likes of KPCB, Battery, Greylock or Andreessen Horowitz.
There are few too many smart guys doing this to dismiss it as hype, so let’s think about what’s really going on. [I was engaged in a great conversation about this on namesake and am recycling some of the content]
VC’s are offering Access
VC’s have a paymaster too: LP’s. LP’s can struggle to get into the best VC funds, even today, and now the best VC funds are offering them access into the winners of tomorrow. Which LP is going to give you trouble for getting into facebook, really ? How about google pre-IPO?
VC’s are offering Brand
Assume EVERYONE wants a piece of Facebook and think, for a second, from the company’s standpoint: with the valuation being huge and hence irrelevant, who will be best for them as incoming investor ? Having a cool VC brand (if there is such a thing) says to the market:
- We’re still a startup and we have savvy insiders backing us, not some faceless mutual funds or hedge fund
- The VC’s are giving us their money rather than funding new early stage competitors, we’re officially declaring game over on our segment !
- We get Mary Meeker to do our IPO roadshow slides for us
Compare and contrast with the negativity hitting the Wellcome Trust for its investment in Wonga. Umair Haque is giving them a beating on twitter right now: “You couldn’t find a more perfect example of the ponziconomy if you tried. Future health benefits? Traded for ultra high interest rate debt”. No one would have batted an eyelid if it was KP coming in… Although arguably a real coup from Wonga in buying cred !
In any event, the halo effect is mutual; call it “branding congruence”. As @cdixon nicely put it, the VC’s are coining a new VC phrase: “buying posters” = VCs buying late stage shares of hot companies to put the company’s logo in their lobby”.
The risk / return profile is not bad
Deals are surely often structured, though probably not facebook). At face value the price looks huge but a guaranteed return is baked in. Hence the financial logic is easy to defend. zynga at $7bn with 1.5 preference or similar. The company gets a great headline number, the VC gets a reasonable return on a big wad of cash and everyone is happy
Ecosystem in resonance
LP’s are concentrating their investments in the best name. Now these franchises are all doing each other’s deals. They’re owning the sector; it’s every money manager’s wet dream of a crossover fund coming true. Sequoia built this organically. Fund me, fund you. Oh, and think about the relationship with the acquirors and the future startups created by talented leavers. Remember the Sequoia / Intel conveyor belt of startup / acquisition / startup. The ecosystem is entering a form of perfect resonance. Even Union Square Ventures’ Opportunity Fund is a perfect example of this.
Remember, resonance is a powerful thing, it’s also been known to destroy bridges.
- Are these deals best for the GP’s because they put fund in the black at the expense of great IRR’s ?
- Are VC’s really qualified to do momentum late stage investment ? Is access all there is to it ?
- Do I really need to get billion dollar companies built to feel good about myself ? Back to work then, PriceMinister and Dailymotion are both in a different class )
I could go on but my arm is hurting. This continues to be a fun market…
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