Operating experience has become a buzzword over the last few years as venture capitalists pump up their resumes in a quest to set themselves apart from other sources of startup capital. Now, it seems that we are seeing the next evolution of that trend.
This year has seen a wave of startup consultant firms looking to raise venture funds of their own to take stakes in companies they are already working with or that align with their practice. In theory, this makes total sense because both consultants and venture capitalists have the same goal at the end of the day: helping companies grow.
But why are so many consultant-led venture capital funds launching now? It’s a particularly rough time in the broader venture market, and economy in general, in addition to being one of the toughest periods for emerging managers and first-time fundraisers. It’s worth noting that all of these funds are raising outside capital as opposed to investing off their balance sheets.
For one thing, the startups they were already working with were asking them to.
Alex Harris, a founding partner at fintech consultant Fiat Growth, said they would get asked about backing some of the companies they worked with — which include Copper Banking, Sundae and Root Insurance — but it really clicked that they should raise a fund when one of their clients was so successful it became hard to ignore what they would have gotten if they were investors.
“We had taken a client from $100,000 to $20 million in ARR in 12 months,” Harris recalled. “We had a decent piece of the company from advisor equity and realized that we have had a number of great results, but that one stood out. [We thought], ‘Wow, we really should invest in that.’”
Harris has since helped launch Fiat Ventures, a $25 million venture fund with the same focus: helping early-stage fintech companies grow. Fiat Ventures is a fully separate entity from Fiat Growth but shares many of the same employees.
FNDR, a consultancy that helps startups develop and refine their storytelling, found itself in a similar situation. The consultancy that’s worked with the likes of Brex, Roblox and Airtable just announced a foray into venture investing, for similar reasons, earlier this month at the Slush conference, PitchBook reported.
FNDR founder and CEO James Vincent told TechCrunch that while being able to invest in the companies it works with was never a concrete part of its plans, FNDR started getting asked to join really attractive opportunities.
“There has been incredible equity in storytelling. Over the last two to three years we’ve been asked by a lot of founders to join their cap table. The founder wants us on the journey. We’ve spent time with them and shown great intimacy. We don’t do it with everybody,” he said, adding that FNDR only invests in companies it already works with.
While Fiat Ventures doesn’t plan to invest the entire fund into companies it is already working with — Harris anticipates about a third of the fund will go into new opportunities — Harris said that having the consultant company as well sets the venture fund up for great deal flow.
Dcode, which launched in 2016 to help startups navigate the thorny process of applying for government contracts, found itself in a similar situation and launched a $50 million fund earlier this year. Considering Dcode literally helps companies secure revenue-producing contracts, the setup may make sense; if Dcode thinks a company is a good fit for its consultancy practice, why not invest, too, if they are going to directly help the startup secure meaningful upside?
“As we built the acceleration program, companies would come and ask us if we could invest in their rounds because we are so helpful,” Meagan Metzger, a partner at Dcode and Dcode Capital, told TechCrunch back in June. “We didn’t want to get distracted because fundraising is a full-time job. We reached a peak point where the demand was just so high from our portfolio.”
But even with great deal flow — a lot of other types of investors could say that as well, of course — these funds launched into a particularly tough time to fundraise.
Harris said that Fiat found that LPs resonated with its pitch because, despite not having a firm track record for investment, Fiat could show what kinds of companies it was already getting inbound interest from, which is a relatively differentiated strategy.
“It really resonated well with a lot of people,” Harris said. “Our growth expertise and our track record on the growth side, that wasn’t questioned. We had true differentiation in a tighter market.”
For FNDR, some of the calls to launch a fund came from different investors who wanted to back it. Vincent said that it got a lot of interest from VCs who wanted to back it because FNDR was getting asked to join cap tables they themselves couldn’t get on.
FNDR’s fund structure is nontraditional, too. Instead of a traditional closed-end fund, it’s looking to raise the capital needed to write 10 to 15 checks a year — it’s already invested in a handful of companies — that range from $100,000 to $1 million, but it isn’t looking to put a specific target in place, venture partner Fabri Cara said.
Cara added that the fluidity also helps make it very clear that venture is not the core of the business — the narrative crafting is — so that the mission stays aligned. However, Vincent thinks that not being traditional VCs could be their biggest value-add.
“They aren’t coming to us because our capital smells any better,” Vincent said. “We are in this position where we are providing what is seen as an incredibly useful asset. Most come on board because we provide the capital, plus. What is that plus? The plus with us is storytelling.”
Harris echoed that statement.
“That’s my favorite part: I don’t think of myself as a venture capitalist; I think of myself as a growth guy,” Harris said. “I have general best practices learned and collected working with 100 companies. We have built out this playbook that we think is very actionable. We aren’t just value-add in terms of an intro or two — we bring a refined playbook that we have learned over time.”
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