Why the VC Game Is Attracting a Whole New Set of Players
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This article is part of our Trends 2016 coverage.
Earlier this year, Boston-based 3-D printing company Voxel8 raised $12 million in Series A funding. Among the windfall were contributions from Autodesk’s Spark Investment Fund -- the software company’s $100 million 3-D printing investment initiative -- and In-Q-Tel, the CIA’s venture fund for intelligence-related innovations.
Wireless intercom company Nucleus scored more than $1.6 million in seed investments this year, $100,000 of which came from Philadelphia’s $6 million StartUp PHL fund, which makes equity investments in local entrepreneurs. And Back to the Roots, a San Francisco-area sustainable-food company, raised $650,000 two years ago from Fund Good Jobs, a $2.53 million philanthropic venture fund focused on job creation.
These unconventional VC groups aren’t anomalies. In recent years, corporations, municipalities, university alumni groups and philanthropic groups with agendas beyond reaping financial rewards have jumped into the equity financing game.
Take corporate venture capital, which is on the rise. By year’s end, U.S. corporate VC groups will have outpaced the $12.31 billion in investments they made in 2014, according to VC data clearinghouse CB Insights.
“A typical party line is that you want very smart institutional investors from typical VC groups,” says Daniel Oliver, co-founder of Voxel8. “But on the strategic investment side, you can also get really great input.”
In fact, Autodesk partnered with Voxel8 to develop a design tool that helps people create devices for 3-D printing, and In-Q-Tel is interested in using the printers Voxel8 is developing.
Mike Collins, co-founder of Launch Angels, a VC firm that creates and manages university alumni investment funds, credits technological innovations with the rise in nontraditional VC groups. With geographically diverse investment committees easily able to meet by Skype or Google Hangouts, managing alumni investment teams is a cinch, Collins explains.
What’s more, the ubiquity of tech startups -- and the decreased financial barrier to entry -- has prompted Philadelphia and Detroit, among other cities, to begin offering venture capital in an effort to boost economic development, create jobs and attract young people, says Archna Sahay, Philadelphia’s manager of entrepreneurial investment.
“The existence of early-stage capital is missing in the ecosystem,” Sahay says. And with traditional venture funding not always available to young companies, it makes sense for entrepreneurs to consider the alternatives.
Of course, most hybrid venture funds come with their own set of caveats. The trick to accepting alternative VC is ensuring that your goals mesh with those of your investors. When Nucleus founder Jonathan Frankel accepted six figures from StartUp PHL, he agreed that his company would remain in Philadelphia for 18 months. Likewise, Back to the Roots had to upgrade its employee benefits package before Fund Good Jobs would consider leading a $2 million angel round. “They wouldn’t invest until we provided healthcare for the whole team,” says Back to the Roots co-founder Alejandro Velez, noting that his company had eight employees at the time.
Some alternative VCs have a more sophisticated understanding of the startup world than others and, as a result, can offer more useful advice and introductions. Consider StartUp PHL. By teaming up with traditional VC firm First Round Capital, the city of Philadelphia has substantially upped the mentorship ante for the entrepreneurs it funds.
For Frankel, the willingness of First Round Capital’s Josh Kopelman to weigh in with the occasional suggestion has been a bonus for Nucleus. “There are very few people who write you a check and then just disappear,” he says. “Either they’re checking in too frequently and offering bad advice or, like StartUp PHL, they’re available when necessary to lend an ear and a hand. People should just be careful to determine which type of investor they’re taking money from.”