Dear Limited Partners, Founders & Advisors,
Earlier this month, the World Economic Forum convened. One of the key topics among CEOs, economists, and world leaders in Davos continues to be the Future of Work.
We believe the Future of Work is more important than ever. With employee burnout rapidly increasing, healthcare costs accelerating, employees more disengaged than ever, and a rapidly expanding global skills gap, a massive opportunity exists to leverage technology and solve growing workforce challenges.
We are excited about the opportunity to build a company and investment fund addressing critical workforce issues while creating a broader impact on society. As an early stage investor, Acadian Ventures invests on behalf of our limited partners. We have a deep commitment to our entrepreneurs and founding teams with whom we invest and a keen responsibility to the limited partners who have entrusted us to be stewards of their capital.
We are nearly one year into our journey as venture capital investors and I wanted to provide a glimpse into our experiences over the last year, how we are making decisions, and a look into 2020.
Building our Foundation
2019 was a foundational year for Acadian Ventures. We started the year with an idea and investment thesis, and closed the year with 15 limited partners and 3 portfolio companies. Like many of the entrepreneurs with whom we invest, we have chosen to bootstrap the fund. Sometimes this means our ambitious goals may take longer than we desire, but we believe this approach builds discipline, persistence, and long-term value creation.
We consider ourselves a startup company not a venture fund. We serve our customers -- the entrepreneurs and founders with whom we invest. We have investors -- our limited partners who have entrusted us with their capital. We believe in brand-building and doing this through our research, relationships, and the trust we build with all of our stakeholders.
In 2019, we completed two closes of our first fund. Our “rolling close” has allowed us to add new limited partners in the fund. We have tried to be methodical by bringing in the right investors at the right time while building our track record of early-stage investments with the potential to mature quickly. Our goal is to have limited partners that prioritize social impact with economic gain. We are fortunate to have some of the leading operators, advisors, and experts affiliated with the fund. We believe the collective knowledge, experiences, and backgrounds of our limited partners will be hugely valuable to the companies in which we invest and ultimately the growth of our fund.
We currently have 3 portfolio companies in our fund -- Clearedin, jobpal, and Nomi Health. We started actively investing in Q2 2019 and are on-target with our planned investment pace of 4-6 new investments every year. Our average check size is just under $250K, below the low end of the target first check size of $250-500K. As a result, our initial investments are below the target ownership of 5%. We have consciously invested below our target range, focusing instead on finding compelling entrepreneurs and companies that will build our track record. We expect to begin hitting our target equity ownership of 5% or greater in early 2020.
What have we learned in our first 12 months as a new venture capital firm? First, hitting our target IRR performance requires selecting great companies and taking a portfolio approach to our fund. We expect to re-evaluate our fund models frequently and re-balance our portfolio based on assessing various risk factors. Seed stage investing is part art, part science. Research (i.e. the science) is a critical component of our investment strategy. The art is knowing when to over-index on a founding team or market opportunity.
Second, fundraising is just as hard as we expected. Instead of casting a wide net of prospective limited partners, we have been highly targeted in our limited partner outreach focusing on doing what we said we would do with our early limited partners and building ambassadors for our company. As we begin to close Fund I, we need to showcase the uniqueness of our fund strategy, the quality of our decision-making, and the potential of our initial portfolio companies. Fundraising is an essential component of venture capital and we have an “always be raising” mentality. We intend to invest more time and energy in fundraising over the first half of 2020.
Lastly, as an emerging manager, single general partner (“GP”) fund, we are experiencing the constraints of our available bandwidth. On any given day, we are fundraising, touching base with limited partners, sourcing investment opportunities, working with our portfolio companies on their business and go-to-market strategy, creating content and brand awareness for the fund, managing the fund balance sheet, and the list goes on. We are exploring ways to expand our company by leveraging additional resources that can support our short and long-term goals.
“Your ambitions and goals always outstrip your resources.”
Kirsten Green, Forerunner Ventures
While we are encouraged about the progress in our fund, we have more work to do. In particular, we are not achieving our goals to create more diversity in our company and our portfolio companies. We desire to influence #TheGapTable. Less than 10% of our limited partners are female or female-led funds and this needs to be much greater. In addition, our portfolio companies are dominated by non-diverse founding teams. We are taking a conscious effort to source and evaluate female-led companies and will track our progress closely.
Current State of Venture Capital
As a first-time venture capital firm, we believe an important part of our success is understanding broader trends in the venture capital asset class and have a point of view on where we can best achieve our target performance objectives.
Here’s the bad news...venture capital is currently oversaturated with capital. It has been that way for nearly a decade. In 2019, $213 billion of venture capital was invested globally. Over 1,000 micro-venture funds have been created within the last 5 years. The resulting effect of an overabundance of capital is outsized valuations, increased competition, and highly accelerated decision cycles. We are very conscious of entering an asset class on the verge of peak valuations.
We have three reasons to be optimistic though. First, we are starting to see the demand from early-stage startups for specialized firms that bring unique expertise in addition to capital. While venture capital funding was down from its recent high of $118 billion in 2018, investment in Future of Work companies increased nearly 10%. The emergence of “boutique” early-stage funds like Acadian, are becoming highly desired by entrepreneurs that desire more hands-on support. Our investments are supported by research and operational experience which often means we will be resistant to the “follow the crowd” mentality you often see among non-specialized funds.
Second, we are trying to take a non-consensus approach to geographical preference. Today, over 77% of VC funding in the US goes to 3 states: California, New York, and Massachusetts. This presents an opportunity for Acadian to uncover underserved regions in the US to invest. We believe great companies can be found anywhere in the world. In fact, in our recently released Future of Work Global Index, only 26% of Future of Work companies are based in Silicon Valley. We think there is a distinct advantage for our company to be based outside of the Bay Area where most early-stage investors reside. In addition, we see a growing need for seed stage investment in Europe. Overall, Europe accounts for only 15% of all VC funding. Many European countries are creating economic incentives to drive local innovation and we think this is an opportune time to be investing in Europe.
Lastly, we believe alpha can still be created with first time venture funds. In fact, research from Prequin suggests first time venture capital funds have generated substantially higher median returns than funds of experienced managers. According to Prequin, “Managers that achieve success are often those that can communicate the virtues of both their fund and the smaller first-time fund landscape, rather than simply presenting themselves as the potential superstar brand name of the future.”
“First time managers outperformed experienced managers for 2006-2014 vintage venture capital funds.”
Prequin, November 2017
Our Approach to Building Enduring Companies
At the core of our investment strategy is “employee-first” companies and putting the worker in the center of all decisions. As we begin to shape our portfolio and fine-tune our investment criteria, we find ourselves gravitating towards a few core qualities for our investments.
- Perseverance. Founders must have the stamina to manage the emotional roller-coaster of ups and downs within a startup.
- Rapid Iteration. Founding teams must be obsessed with the product and rapidly test new ideas.
- Creative Problem-solving. The company must be thoughtful about making decisions and find creativity in solving important problems.
- Frictionless Design. We are strong believers in the movement from process/feature apps to data/outcomes apps designed specifically for the end user.
- Business Model Innovation. With markets highly saturated with software products, we believe startups must differentiate in how they go to market and appeal to customers (and users.)
- Category Creators. We overweight decisions towards companies that have the potential to create and lead new categories.
Achieving Success in 2020
We have three primary objectives for 2020.
Our Customers. At its core, venture capital is about sourcing, picking, winning, and helping entrepreneurs. While “picking” is the most important factor in determining winners and losers, all factors ultimately affect fund performance. We intend to invest more time in sourcing, notably expanding our network of other venture capital firms, with a focus on improving the quality of our deal flow. One of the differentiators of Acadian is our operational experience scaling companies and we intend to be more hands-on with our portfolio companies to support their decision-making and growth.
Our Investors. We believe it is important to be efficient in fund-raising. While it is difficult to predict when we will close Fund I, we have built a plan to close the fund in the first half of 2020. Along the journey, we believe in building long-term relationships with institutional LPs even if they do not result in supporting our first fund. In addition to closing the fund, we desire to bring more diversity to our limited partnership and it will be something we are watching closely.
Our Brand. Brand will be the sustaining advantage as our fund matures. We intend to increase the brand awareness of our company through content, thought leadership, and reputation. We recently launched new content to bring more exposure to the market and will be releasing our market guides and fund playbooks to assist all entrepreneurs in their company building.
We appreciate your continued support and couldn’t be more excited for 2020.
Jason Corsello, General Partner