The Opportunity / Growth Fund Trend

With yesterday’s announcement that early-stage VC Greycroft has raised a $200 million growth fund, this type of fund has officially become a trend. But before we dig into the dynamics of it, let’s pay homage to the originator of this concept, Union Square Ventures.

In January 2011, USV raised what I believe was the first “opportunity fund.” Prior to this, plenty of VC firms invested across the early stage to late stage spectrum from the same fund (e.g. Battery, General Catalyst, Sequoia, Greylock, Bessemer). Others had separate early stage funds and late stage funds, often with separate teams and economics (e.g. Redpoint, DFJ, North Bridge) typically aimed at different opportunities. But the USV Opportunity Fund was the first time, at least in the post 2001-Internet bubble cycle (or last decade, if you want to put it that way) where an early stage firm created a separate fund to invest in late stage rounds of their existing early-stage portfolio companies. In USV’s case, Fred Wilson explains the strategy extremely clearly in the post The Opportunity Fund.

Greycroft is the latest firm to raise this type of fund. In the last week I’ve talked to two other early stage VC firms who are raising similar opportunity funds. In one case they referred to it as a growth fund. In the other case they referred to it as an opportunity fund.

In the fall of 2013, we raised a similar type of fund called Foundry Group Select. It was a $225 million fund, just like our other three $225 million funds raised in 2007, 2010, and 2013. But we called it “Select” instead of “Growth” or “Opportunity” for a specific reason – we only use it to invest in existing portfolio companies of ours.

USV has done a magnificent job of investing in later stage rounds of their existing portfolio companies as well as later stage rounds of companies that fit tightly within their investment thesis. We decided to drop the second half of that strategy as we didn’t want to spend time being late stage investors. It’s not natural for us as an entry point and we didn’t want to add anyone to our team since keeping our team size exactly the same is a deeply held belief of ours.

The decision to raise this fund came out of a combination of desire and frustration. We have a well-defined fund strategy, based on a constant size of each of our funds. Our goal is to make about 30 investments in each fund (2007 has 28, 2010 had 31) that range between $5m and $15m over the life of the company. Part of this strategy is that we are syndication agnostic – we are happy to go it alone through two or three rounds of a company if we have conviction about what they are doing. We are equally happy to syndicate with one or two other VC firms. Either way, while we focus on being capital efficient (we’d rather not overfund the companies we are involved in early), we are interested in buying as much ownership as we can at the early stages.

As a result, when a company begins to accelerate dramatically, we weren’t in a position to contribute meaningfully to the later stage rounds since we’d likely already have something in the $10m to $15m range invested. That’s the desire part of the equation – we knew we could make money off a later stage investment, but when we were talking about investing an incremental $1m or $2m it didn’t really matter much.

The frustration part was more vexing to us. In a number of our successful companies, we saw a long line of financial investors lining up to follow. None of them would engage as a lead, but all want to participate when a round came together. If a company was raising $30m, we’d have $50m+ of “followers” waiting to take whatever was left. We didn’t find that particularly helpful.

So we raised Foundry Group Select. We explicitly limited it to only companies we were already investors in and on the boards of. As a result, it is literally zero incremental work for us since we are already deeply involved in the companies we are investing in. This led us to an interesting decision – since we recycle 100% of our management fee, why would we charge a management fee on this fund if we are doing no incremental work? The conclusion was easy – we don’t charge a management fee. We only make money when the investments make money, resulting in very tight alignment with our LPs.

To date, we’ve invested from Foundry Group Select in Fitbit, Sympoz, Return Path, Gnip (acquired by Twitter), and Orbotix. It’s been a powerful addition to our strategy without creating any extra overhead on us.

I’ll end where I started – by paying homage to our friends at Union Square Ventures. They’ve led the way on many elements of early-stage investing post-Internet bubble, dating back to 2004 when Fred and Brad raised the first USV fund. As the “opportunity fund” becomes a trend, they’ve once again created something that, in hindsight, looks brilliant.

  • Dave

    Your and USV’s approaches to growth equity are very interesting and make a ton of sense. Foundry’s approach of focusing on your own companies, rather than trying to develop a new skill set in growth equity investing makes perfect sense and would be a huge value add for your companies and investors. Done well, growth equity investing into new investments is a different skill set–Meritech, TCV, TA, Insight, etc. all have strong track records and understand that type of investment with high valuation, non-controlling, significant investment in sales scaling, etc. Many of the newer players to growth equity, particularly the buyout funds, have different skill sets and it seems more likely to end badly than to go well.

    Did you set different expectations with your investors?

    While VC and growth equity funds often have similar IRRs, it seems like they get there in very different ways. VCs with typically a more home run driven approach. Growth equity tends to have some nice wins with fewer losers over a shorter period of time–which increases the time value function of IRR. No management fee and giving your investors the choice to be in growth equity–as opposed to having style creep in your core VC funds or raising a bigger VC fund–is to be hugely commended. I’m sure your investors love you for it.

    • Thx. The expectations that we set with our investors are consistent with what you say here – similar IRR but from solid wins and few losers, over a shorter time period.

  • Just wanted to say that this is not only great for Foundry and its LPs, but also has tremendous advantages for your portfolio companies (like my company – Moz). We know you well, we love working with you, and if/when we decide/need to raise a growth round, it’s very re-assuring to know we won’t be out pitching strangers (and then, worse, finding out if they’re good to work with).

    The only downside I can see is the same downside that exists when VCs do accelerator-style rounds/funding. If, when the time comes, Foundry passes on a growth round of an existing portfolio company, it can send a bad message. When you didn’t have a growth round available, other investors could simply assume you would participate if you could. Hopefully, though, that doesn’t come up too often.

    • Yup – the signaling issue exists, but my guess is that it’s an extreme edge case.

      • Patrick Hidalgo

        Couldn’t you create a mechanism/syndicate to have investors step in and participate in that round? It might not avoid signalling all together, but it would be participation at least in name and you could get carry. Taking it one step further, maybe there would be a market to buy/sell these rights.

        • I’m not sure I get what you are suggesting.

          • Patrick Hidalgo

            Let’s say your first round allocation puts you at 5% ownership. Let’s also assume that the second round would drop your ownership to 2.5% if you did not make an additional allocation. Finally, let’s assume that the second round is oversubscribed and you are not interested in/cannot make an additional allocation. Couldn’t you market the 2.5% that you are not going to contribute?

          • Maybe, but a lot of pro-rata rights can’t be resold, nor should they be.

    • great point Rand. this is helpful to both the LPs and the entrepreneurs we back.

  • Richard Leavitt

    Does this change in any way who typically sets the price of an investment made from the Select fund? I imagine it follows the same pattern that we still seek a new investor to lead and set price. Or asked another way, since Select fund companies are all known and desirable follow-on investments, are you in the best position to lead?

    • Regarding the pattern you describe: “I imagine it follows the same pattern that we still seek a new investor to lead and set price.” – we actually don’t follow that pattern. In some rounds, there is an outside investor who leads the new round. In other cases, we’ll just set price and lead the new round. We’ve been doing this since we started Foundry Group in 2007 – it’s part of our syndication agnostic approach where we are perfectly comfortable leading new rounds of companies we are already investors in.
      Given the size of the rounds that Foundry Select is in, we’ll often have a new investor lead. But it’s not a requirement.

  • Can you comment on how this impacts competition between VC firms who had growth/opportunity stages as their sweet spot.

    They might in turn decide to raise earlier stage funds to get in earlier. Are you seeing that potential too? For e.g. A16Z has a seed fund already alongside their other funds.

    • I don’t pay much attention to VC fund competition, nor do I think about it very much, so I don’t have a good answer.

      • I asked because I’m seeing a lot of new funds raising a ton of new money, almost to the 2000 aggregate levels. So when the supply side of quality of startups is filled, the excess availability of capital will go to fund lower quality startups and that won’t generate the expected returns, no?

        • I’m not sure we are anywhere near the 2000 level. I haven’t been tracking it, but that was somewhere in the $80b – $100b range. What data do you have for 2013 / 2014?

          • Was that 80-100B just for Internet/Software/Tech?

            It seems that we are close to 2001 in startup investments, with 9.5B in Q12014, and that could be a leading bullish indicator for the funds raising part. But I haven’t seen the funds data for Q2 2014 which is where I’m sensing it might be high, judging by the headlines on AltAssets.

            I eyeballed it to $35B in June alone but that covers all private equity. I’ll keep digging but one could count the tech ones and that would be one dip stick reading. It could also be that June was unusually high as a pre-summer factor.

          • It’s not $ raised for startups.

            It’s $’s raised for VC funds.

            You really need to focus on the input / output model to understand what is going on.

          • I think I understood that. There are 2 parts: a) $ raised by startups, and b) $ raised by funds.

            If b) is reaching records, the cascade effect is that a) will rise in the quarters following that.

          • Yup! And I don’t think (b) is anywhere close to where it was at the peak in 2000.

            2000 capital commitments to VC funds were $100b

            2012 capital commitments to VC funds was around $20b

            It’s definitely trending up in 2013 and 2014, but I don’t have the numbers. But there are some fun facts at

          • Andrew Pitz

            Jumping in where I’m not asked, I read about 3 months ago on another VC blog that funds raised by VCs was in the 16-18B range. I’m really sorry I can’t find the post (will keep looking), but the stats were supporting the argument that we are not in another bubble and that the supply and demand was equalizing.

  • yazinsai

    It is SO COOL that I’m finally starting to get all the VC lingo. Thanks, in no small part, to the Venture Deals book and the ongoing course on NovoEd! 🙂

    • Awesome – glad it’s helping.


    The “opportunity” is in raising one of those funds. Can you tell us how to do that?

    • Have great returns. Do what you say you are going to do over a long time. Have an open, trusting relationship with your LPs.

  • Am I wrong or is there a potential for a conflict of interest when the LP of the two funds are different. Early Stage fund would presumably want a higher valuation at than the opport

    • There is the potential for this, but our LPs are almost the same across the funds. We’ve had a tiny amount of change over the years, but over 80% is the same across all the funds so we’ve got alignment there.

      Also, VCs should ultimately be return seeking, so artificially high intermediate valuations don’t really accomplish anything. It’s a much longer post, but the alignment between early stage and opportunity fund is the least powerful part of this dynamic.

  • Nicely put. Definitely a trend (and a good one). This may be worth a quick scan, from Nov 2013, see the first few bullets:

  • Fares

    With Foundry Select, do you lead follow-on investments or do you just exercise your pro-rata and let others syndicate and structure the deals?

  • the no management fee bit is unusual and kudos to you and your partners for doing that. since about 25% of our Oppty Fund investments are new names, we do charge a 1% fee but only on “capital at work”. the net of that is the mgmt fee load goes from something like 20% to something like 3-4% over the life of the fund. lowering mgmt fees is a great way to make more carry!!!