Founders Circle Capital, a nine-year-old San Francisco-based investment firm that has agreements with private venture capital companies to buy some of their founders and employees’ vested stock options – so they can buy a home or just breathe a little easier – has closed its newest fund with $ 355 million committed capital, bringing the company’s total assets under management to nearly $ 1 billion.
Unsurprisingly, the company has more competition than ever – both from other secondary investment firms and from aggressive outfits like Tiger Global, which routinely acquire secondary stakes in companies, as well as special-purpose acquisition firms that get companies public much faster Bring and Alleviate Early shareholders’ need to cash out through private sales is also bringing a new twist to their business.
According to co-founder and CEO Ken Loveless and the chief people officer of the outfit, Mark Dempster, Founders Circle now also offers startups what is known as flexible capital. We talked over Zoom with Loveless and Dempster late last week about the new fund and what they’re seeing out there in general. The following are excerpts from this chat, edited for length and clarity.
TC: This is your third fund. How does it compare to your previous funds?
KL: We collected three main resources. This is our third, but we’ve addressed around 17 entities [altogether]including some co-investment vehicles and special purpose vehicles to invest in some of our businesses.
TC: And now you are changing your approach a little. How?
MD: [We’re now offering] a mix of primary and secondary [investment dollars] and we can [offer these] at any time and in any combination. These [investments] don’t have to happen during a particular one [distinct] Financing round; We could get involved in eight to ten different investments [tied to the company].
TC: Do you have a debt partner so you can have more capital when you need it?
KL: We have a strategic partnership with Silicon Valley Bank, so they tend to be the lender to these people when they release their liquidity. In many cases, we offer an equity backstop for this.
TC: How has your world changed since people may see a light at the end of the tunnel and companies become publicly traded companies in a variety of ways that we haven’t seen in the past few years? Are employees or founders more or less hesitant to share their stakes in secondary transactions?
KL: There has been no major change. We had floated a portfolio company in UiPath that was 16 years old. If you think about how many things will change in your life during this period, this would be a pretty long list. We also had [stakes] in DoorDash and Poshmark, and if you look at the time between their inception and going public, it’s been nearly a decade for both of them. So [while there is some market receptivity for companies] that’s really two or three years old, the average [time from launch to publicly traded company] is still more than 10 years on average.
TC: Lots of outfits compete for the same stocks you want to buy, including Tiger Global which in many cases pays very high prices. In addition to competing with these companies, I wonder if you will ever sell your shares to them.
KL: We are usually a long-only investor. We didn’t sell any two shares. We usually hold a public offer. We really try to focus on those companies that can really operate in lasting companies that are decades old. We wouldn’t last that long, of course, but we’re sticking to the public markets.
TC: How long do you keep your shares?
KL: We are not bound [by anything] but what we say ours [investors] is that we usually hold an average of one year after the public offer [then distribute the shares to them].
TC: How do you play this SPAC phenomenon, if at all? Do you see opportunities to jump into these blank check companies before they merge with brands you may have been pursuing?
KL: We didn’t participate in a SPAC directly, but we merged some of our portfolio companies with some SPACs to become what we hope public companies can withstand. So we took advantage of it [those exits] as a financing instrument.
TC: You’ve been around for about a decade. How many companies have you supported and how many have left the company?
MD: We invested in 73 companies and 31 left the company.
TC: I know you tend to invest at a later date. Have there been any downtime due to unforeseen circumstances?
MD: We haven’t had any company downtime.
TC: And what about what you have to pay? How has that changed in the last year or so?
KL: We just did some analysis, and if you tune in for the growth, we didn’t see a significant increase in the reviews we paid compared to pre-pandemic prices. We’re paying the same dollar for a growth point as before [COVID-19 struck the U.S.].
TC: Why do you think is that so?
KL: Companies with a solid unit economy can both compare their internal metrics better and investors better understand them and metrics. Investor consistency and underwriting just keeps getting better.