The Opportunity Fund
We believe the venture capital business is a services business and the entrepreneur is the client. Over the past few years we have come across a number of entrepreneurs who we would have loved to work with but who had specific capital needs we could not satisfy with our fund structure.
Over the past several months we fixed that and we now have an additional tool in our toolbox. We call it The Opportunity Fund and we've described it and how it will work on the USV blog this morning.
I'm very excited to have this additional flexibility and I am also very excited to be able to call John Buttrick a partner. John has been hanging around USV from the very start, advising us, and supporting us in so many ways. He will make us even better investors and partners for entrepreneurs. Which is a great thing.
Is there a conflict with two funds with two different sets of LPs investing in the same companies? Will the opportunity fund lead and set prices of later rounds of companies that the core fund invested in?
We are blessed to have almost identical LPs across all three funds. So theconflict issue was not a big deal for usYes the Opportunity Fund will lead and price rounds for existing portfoliocompanies. We do this a lot already and now we have the ability to do itwhen the round sizes get larger
I see. The same LPs make it a much lesser issue.
I don’t really understand how “funds” work. Does that concept let certain of your LPs invest in certain types of deals? Do different funds carry different risk characteristics? Can a single investment come from multiple funds within the same firm?
a fund invests in a certain number of companies. our core funds will have between 20 and 25 companies in them. the opportunity fund will have 10-12 companies so it will be more concentrated. the core funds are higher risk/higher reward and the opportunity fund should be lower risk/lower reward
Like the branding. Opportunity Fund has a powerful ring to it. Charging fees only on capital invested seems pretty decent too.- hope you don’t go spending the lot on Facebook shares on SecondMarket 🙂
That is not our intention
Good observation on the “branding” aspect, Liad. Very true.
I like it too. A riff on’opportunity cost’, while ‘opportunistic’ underscores we’ll only do it if it makes sense for us. If it doesn’t we’re leaving it on the table.well-played.
Contests Fred. Love the scaling strategy. Looking forward to watching USV take it to the next level.I love the approach of only charging fees on the capital invested. You and USV really understand you have “customers” on both ends, the investors AND the start-up and have built a great environment to support them.
Agreed on the strategy of charging fees only on the capital invested. Great move for alignment.
Congratulations, Fred, John and U.S.V. This is a great move (especially with how you’ve not promised to invest all available funds and structured fees accordingly). This should be good news for U.S.V., the L.P.s, and entrepreneurs. I’m looking forward to watching the developments.
Read your current post re patents in China along with the Wadhwa column in Bloomberg you linked. Something to think about.
Thanks, Dave. Glad you stopped by.
Using water as an anology, it is useful to remember the encampment’s greatest tool, located toward the top of the hill is control of water. Most think of unscalable walls. In the long term, he who controls the volume of water flowing to those downstream controls the game.Like many big companies that look to acquire smaller companies gaining the intellectual, the Chinese will look to do the same also. This combined with joining the game of acquiring patents before the actual product is developed leads to potential problems.I agree with the strategy of developing patent rules worldwide because the potential problems, if they are to happen, will come sooner than most anticipate.Otherwise, do the due dilegence needed on both sides of the ocean (as we have) that lessens the potential problems.
Congratulations. You have been a visionary and still leading the VC space with thoughts and actions in ways that many others don’t even come close to.In other words, the USV arsenal now has longer ranges missiles.
congrats on the fund boss. hope you will set aside a small portion for rubbing in and embarrassing poorer folks, and a larger portion for embarrassing your amateur peers blowing bubbles.
Felicidades! Best of luck with the new fund.The USV post certainly reads like this fund and adding John’s particular skills is for larger follow on rounds. If so, why only $165mm (I’m sure you could have easily raised more with the USV track record). Assuming it plays into your philosophy of only raising enough capital (or slightly more) than you think you need, because if it’s lying around you’ll spend it and most likely not too wisely. Just curious.
we can always raise another fund in the future if this turns out to bea big part of what we dobut for now, this seems like the right amountwe are not even sure we will put the entire fund to work andstructured it accordingly
Well played. All the right moves. Getting most of your current investors to take another bite of the apple is a huge compliment and kudo. Good hunting!
Congrats on the new fund. Love the discipline and focus on “networks” or cumulative business models. There will no shortage of companies with new and compelling ideas in this space. Let me know next time you swing through Atlanta.
Congrats!There are two phrases in your USV post that bear repeating:”We believe the irresistible economics of Internet networks will ultimately transform the entire global economy.””Differentiation is more about user experience than proprietary technology. Defensibility is more about network effects than patents.”These may be key to your firms success but are still not obvious to many start ups that I run into. I intend to share them forward (through Disqus) to some of my friends and clients.Forward looking move. Well done.
I agree, Arnold. Those two statements stood out to me as well. Glad you brought additional light to them.
Thanks for gleaning these gems, Arnold.I think that also key to USV’s success is: “The opportunity to invest in networks has changed, and once again we are changing with it.”Impressive agility and the innovative thinking that makes this possible.
Agree Donna.I often look for keys that I can share with start-ups I work with that extract downstream to folks at an operational level not just investors.This particular post had gems aplenty for both.
Congrats from Tokyo!
Nice! Gives you the option to move up the stack.I notice you mentioned spin outs from larger companies a couple of times on the USV blog post about the new fund, is that something you feel you have missed out on in the past? How much of that type of investment do you get to see? Is it something that is on the increase?
Insightful line of questioning, Richard.
yes, deals like Skype and Stumbleupon are inspiring. they take a large network that is being underinvested in inside a big company and release it to entrepreneurs and investors who can get the most out of it
Congratulations !! Mr.Wilson. But as always as much as I would love to see USV make an investment in our fledgling company since we don’t play in the realm that USV is focussed on we may never get that to happen. But it is cool to know you are now offering more to people who can dream and execute an idea. Still I am guessing the rules for investing don’t change one bit, USV and other VC’s may have lot of money to invest but they are still extremely risk averse and won’t invest in something without meeting their checklist criteria.Do you suppose as part of your previous post about “Throwing money” it is still throwing money only at the tried and tested things.I wonder how that post sits together with this post?
i think that people are throwing money at pretty much anything that has web or mobile involved with it right now
congrats Fred. You’ve turned the firm into a leading franchise in no time by VC timeline standards. What’s interesting is unlike some other successful firms you’re limiting the fund size by economic fit and not by your ability to raise capital. That’s the way to wine long term.
Another rung on the capability ladder. Nice work
Fred, this is truly fantastic and impressive news!Congratulations!So many will benefit from this…both directly and through your example.
Mazel Tov.Why the choice to move up the stack – I mean I know the normal funds have caps on them. Didn’t that method serve your interests for a long time?Though you have been talking about new issues that need to be resolved in this market.
Congratulations Fred. Love the strategy. Look forward to seeing where you put this fund to work.
Admittedly I don’t understand all the nuances of investor alignment, but it appears that the new fund is there as a reserve or over draft for huge opportunities, hence the name. Is it too early to give examples of the type of investments John and USV will make with these ear marked opp dollars? Would a company that moves from web attention to local sales like Groupon fall into the opp category?
we don’t believe groupon is a network
In the context of network effects, I’d be interested in your (Fred’s/ USV’s) views regarding free, freemium, & subscription-based services. Do you regard ‘free’ a necessary condition to achieve network effects?
we’ve struggled with this issue so much over the years and that iswhat led me to freemiumthe short answer is yes, but it is a complicated issue
Union Square Ventures: A Real Choice http://goo.gl/fb/e1yGo
Later stage investing?Is this a sign that the end of the world is nigh?Should I look for an arc?
the fund is approx $165mmwe are cognizant of the risk of losing LPs and we do have a diversified base of investors, many of whom would invest more with us if we wanted them tothese are all really good questions and worthy of a long blog post
the initial instinct of our LPs was to talk about the conflict issues but after we walked them through the facts, as we saw them, it was not a difficult discussion
Congrats for the new fund.I´m also curious about how to deal with potential conflicts:1) Some different LPs in both funds2) Valuation of current portfolio companies. For example: if the Op Fund invests in them and there is no other coinvestor in the round. It could happen that there is a big carry and then there is a write off after some years3) Do same cos in both funds have equal exit dates & terms?4) How to avoid bridge financings?I think the Op fund is a good thing for your current investors to protect your current gems that are still in need of some more follow on rounds, but on the other hand it is also a way to put some more risk if those gems finally turn into deceptions. Another way would have been to heavily cash on them.But your LPs have agree to double bet, which shows a truly strong confidence in you. My sincere congrats for it. I would have definetly done the same.
I just saw this here. Had the same question on the USV blog.
We’ve got almost identical LP base in all three funds
the problem could be the “almost”. If the “almost” are no amicable, you can have huge headaches.