In managing one of the largest and longest-standing venture capital fund investment practices in the nation, one of Fairview’s keys to success has been immersive research paired with deliberate execution. Thoroughly vetting emerging trends, developing informed views and taking a tactical approach to building portfolios has been critical to attaining optimal outcomes. One of the areas we have been monitoring very closely in recent years has been the evolution of the seed stage investment landscape (see our report from 2014 here) and the institutionalization of the seed round.
Seed stage investment, historically viewed as the domain of angel investors, has advanced to become a critical component of the institutional venture capital ecosystem, with the potential for significantly outsized returns. A range of factors have driven this shift, including a sharp reduction in the cost to advance technology companies to proof of concept and business model validation — aided by declining infrastructure expenses, the rise of cloud-based software and service providers, and “pay as you grow” cost structures. These trends are expected to persist and we believe there is an extant opportunity to participate in the tremendous value creation potential by investing with the highest quality firms focused on this segment, “institutional seed firms” — those that share many characteristics with traditional best in class venture capital firms.
We have monitored hundreds of new venture capital firms that have been formed in recent years to take advantage of opportunities at the seed stage. Angel investors have institutionalized their investment practices, and numerous venture capitalist and entrepreneurs have formed firms to specialize in seed stage investments.
While Fairview has invested in these opportunities on a limited and opportunistic basis to date, starting in 2017 we will be implementing a more formal seed fund strategy through a programmatic approach.
The funds focused on this segment of the market tend to be small in size (they are sometimes referred to as “micro VC” funds) and number well over 200 in the US alone. They are often led by new teams and feature a high dispersion of returns. As a result, sound manager selection and a portfolio approach are critical to success. Fairview has significant experience investing in small and new venture firms through our well-established and successful next generation manager program. Investing in seed stage funds will leverage our strong pattern recognition abilities, networks within the venture capital industry and diligence capabilities.
In building portfolios, we will target multiple managers per year for vintage year diversification and also look to diversify by geography and sub-industry. Most importantly, Fairview’s seed portfolios will have a heavy emphasis on “institutional quality” seed funds. We will seek to develop long-term relationships with firms possessing the following characteristics:
- Team: Multiple investment partners with a history of working well together
- History: Have raised more than one prior fund and/or have a track record of successful seed stage investment on an institutional platform
- Track Record: A proven record of identifying top entrepreneurs, attracting follow-on capital from top-tier venture capital firms, realizing exits and generating outsized returns
- Scale: A fund size appropriate for the strategy and sufficient to support an institutional infrastructure
- Geography: Sourcing seed stage opportunities can often be hyper-local in nature and therefore we have a preference for a focused approach to geography and managers embedded in local ecosystems
- Investors: The fund should be targeting and able to attract institutional limited partners who share similar views on performance expectations, fund governance and infrastructure.
- Operations: Professional, institutional quality reporting and operational infrastructure should be in place
As with all of our investments, we are seeking to become trusted long-term partners with the firms we back. As the seed stage ecosystem continues to evolve and grow, Fairview will continue to be involved and active. We are very open to building relationships with and providing honest feedback and advice to firms that may not yet meet all of our established criteria. Getting to know managers early and helping and watching them grow and develop has been one of Fairview’s hallmarks. Just as Fairview has always been an active participant in the broader venture capital market, we are strong supporters and believers in the seed stage ecosystem. We look forward to continuing to build new relationships and deploying capital in the space in the coming years.