I caught up today with Foundry’s Jason Mendelson. I always enjoy connecting with him and his partners. Both of our groups love early-stage investing, have a partners-only model and have seen many VC cycles. Foundry’s street smarts also are incredibly impressive. I learn a lot when I speak with them.
What struck me most about the chat, though, was Jason’s vehement belief in fund size discipline. Though they have Zynga in their portfolio and can raise any amount of money they’d like, their second fund is the same size as their first. Another $225 million for their four-member team. “Not a dollar more,” Jason said.
Foundry has made a decision that deserves laud. You see, VCs get paid 2% to 2.5% annual management fee each year for 10 years for every dollar they manage in a fund. So, a $1 billion fund, for example, generates $200+ million of fees to the management company (for more on that, click here). That’s some serious coin. And, it’s a huge incentive to grow future fund sizes.
Unfortunately, a $1 billion fund forces that VC firm to do one of two things to invest such an amount: 1. massively expand the team, and/or 2. pursue growth equity or leveraged buy-outs, whereby they can write larger checks. It’s tough to fit start-ups into the mix. In other words, success often encourages VC firms to exit the business that made them successful to begin with.
At Kepha, we selfishly love working with start-ups. We have a saying: strategy drives fund size, fund size doesn’t drive our strategy. I hope we will one day have a Zynga, and if we do, I want us to be able to do what Foundry did, which is stick to our knitting.