Nov 28, 2016
The 26 most innovative venture capital firms
A look at who’s innovating the business of funding innovation
Every new VC firm that launches touts to be a “new breed of venture capital firm”, but the reality is that most of the time it’s just a straight up old-school VC model.
That being said, VC has seen some massive innovation in the past decade: the rise of the super angels, the subsequent explosion of seed funds, VC blogging, AngelList — today the fundraising environment is certainly different for founders.
As I’m thinking through how to approach investing in Europe (I’ve just moved back here), I started to recall and research the most innovative VC firms and models that I’ve seen in the past years.
Here you can find a list of firms that I think brought the most innovation to the VC landscape in recent times. I’m sure that I’m missing a bunch more, so feel free to tweet me some more and I’ll add them.
Disclaimer: My small investment firm, Mission and Market, is an investor in a number of companies that received prior or further financing by many of the VC firms mentioned in this piece. I try to mention those in the details, but I’m surely biased even only for my knowledge of these firms’ existence.
I know the recommend button is all the way down, but if you think this is interesting, I’d appreciate a click :)
In no particular order:
Correlation Ventures
Correlation Ventures was the first fund to be marketed with the data angle.
I think their strategy is pretty smart, and surely new: they aim to be the dream co-investor for teams looking to fill out a round.
They use analytics and get to a decision in less than two weeks, which is impressive — as their portfolio is, given they’ve made more than 160 investments.
They’re investing out of their second $188M fund (the first was $166M).
AngelList’s Syndicates + Maiden Lane
AngelList has completely changed the early stage investing world, plain and simple.
From intros, to profiles (I use AngelList more than LinkedIn nowadays) and now syndicates it continues to innovate like no other in the venture space.
In particular, Syndicates are the stuff of the future. I’ve been investing in Syndicates sporadically but I’m just stunned at the quality of the stuff I get to see. It’s certainly not perfect at all at the moment, but if you want to innovate this is the price to pay — and I’m sure it will become so in the future.
On top of this, Naval is truly an extraordinary brain and person. Everyone who had the chance to interact with him knows how sharp and kind he is. He’s always been very generous of his time with me.
One of their most recent efforts which had everyone pretty stunned was the announcement of a syndicates-only fund.
This is pretty bold. It’s basically saying that the concept of “proprietary” deal flow is outdated and that by using AngelList anyone can create a well-performing venture fund. The implications of this are hard to fathom, but if you take a look at their portfolio I’m sure you’ll be impressed.
Lots to think about.
Flight Ventures
Gil Pencina is one of the best angels around, having invested in every single major tech company — and he’s also one of the first to have spotted that Syndicates are probably the future of early-stage investing. I deeply respect him for this.
Gil wants Flight.vc to become the Fidelity of startup investing. You choose the vertical, theme or location and Gil will have a syndicate for you to back.
He recruits managers for each syndicate, which do all the work and then he helps them by reviewing the deals and, most importantly maybe, getting the money to flow.
I’m now also an investor in one of his new funds (devoted to deep learning in this case), which are evolving the model even further.
SignalFire
I had the pleasure of meeting Chris in 2013, just after he left General Catalyst and was impressed with his very ambitious vision.
Chris rightly observed that for an industry that is constantly immersed in software, it has used very little of it to innovate. So he set out to create a firm that uses a lot of software to spot investment opportunities as well as help out its companies.
Its software tracks talent and can be used to spot people that are about to start companies as well as help its portfolio companies hire top talent, which is often the #1 problem for companies that need to grow fast.
Signalfire also has a distributed model where top people in Silicon Valley actively help the portfolio companies, and in exchange get access to the software (and I guess better economics on the fund as LPs).
They raised a first $53M fund and should be just about done raising its second $300–350M fund.
Deep Knowledge Ventures
DKV is another pretty futuristic firm that touts its use of data as a competitive advantage. They use a software created by a 3rd-party company called VITAL to spot investment opportunities (mainly in the life sciences sector) — they even named the algorithm to the board in a PR move.
They have launched a specific Life Science fund and are about to launch a new Digital Capital fund focused on BTC, blockchain, AI, data, etc.
Not much else available about them unfortunately.
Tusk Ventures
Tusk recently participated in the A and B rounds of one of our portfolio companies, and I couldn’t be happier.
They’ve developed a brand in Silicon Valley for helping companies navigate hard and uncertain regulatory terrain, which in this case were the #1 risk for the company — having a dedicated team for that makes you a bit more comfortable.
Tusk Ventures gets some serious equity for their work (they also now have a fund, and I don’t know if they invested cash or services) which is oftentimes very lucrative for them, given their first client was Uber.
There have been a lot of work-for-equity schemes around obviously, but I specifically like this one because it is a very scarce skill-set that can actually command equity from top startups (vs say a design firm, of which there are a ton and for which top startups would just pay cash).
Redstone Digital
These guys are sharp. I’ve found them randomly only but I’m impressed with their model.
Redstone basically offers a “VC-as-a-Service” model to big corporates or other type of LPs.
So, instead of saying: “give me your money and we’ll see in 10 years how good we were at managing it” they’re going to these huge institutions and telling them “hey, why don’t you build your own corporate venture fund? we’ll do it for you, but it’ll still be yours”.
That’s a massive value proposition to companies that want to dip their toes in the corporate VC world, but have no idea where to get started and also want to be in control of what they invest.
In this way, Redstone is able to build a massive AUM base for which I imagine they get both fees and carry in a shorter amount of time — while having access to the corporates firepower.
Some conflicts of interest for sure, but if managed correctly this could be a very solid business
Kima Ventures
Kima is a hybrid French / Israeli firm, which in its short existence (6 years) has invested in more than 400 companies.
They do so by moving extremely fast and making investments as often as 2–3 times per week. They invest globally which helps widen the funnel.
The team is distributed and I had the chance to recently meet with Vincent, their partner in London.
On top of being extremely entrepreneur friendly in their speed, they have also built a first in the VC world, a status tracker for their evaluation of a deal: https://status.kimaventures.com/
500 Startups
Dave McClure certainly needs no introduction as well, but his work with 500 can’t be looked over.
Dave has pioneered the high-frequency “index” model of startup investing, with the belief that investors can’t really pick the winner so the best way to invest is to just invest in a whole lot of companies and then follow-on on the best ones.
This approach has made him quite a few enemies in the valley, and didn’t give him a very easy time while in LPs boardrooms (maybe paired with his unorthodox clothing, language and methods) — but I think the numbers will show his acumen in the long run.
I’ve had the chance to shadow Dave for a few weeks back in 2011, and have been extremely impressed by his vision and ambition.
In the time that passed, he has been launching vertical-local funds all over the world given his other thesis that the next big unicorns will be founded all around the world — and he’ll be there first to get a shot at all of them.
Y Combinator
YC has probably had the most impact on the venture scene in the last decade than anything else.
I’ve been fortunate to participate in a YC batch with my company to see what the hype is all about.
Jessica and Paul are true visionaries, and with the ambition of Sam YC is not really stopping for a moment.
It’s crazy to think that when they first launched, there was no early stage acceleration program for startups — with the millions that exist today — but it was really thanks to them that all of this movement was born and that so many people now are even aware of entrepreneurship as an avenue for their future.
SOSV
I’ve gotten to know the guys at SOSV through their Indie.bio program which is run in SF by Ryan and have been extremely impressed with their approach.
They create a number of vertical accelerators and exclusively fund all operations and investments, plus they have a core fund that follows on on the best graduates.
This gets all of the benefits of the vertical approach (high value add, good screening capacity, great deal flow), with the diversification of different verticals.
We’ve invested in two of their companies and are looking forward to finding even more.
They tout $250M AUM, 500 startups and a solid 30% net IRR.
You should read the fascinating story of the founder.
Entrepreneur First
I can’t recall the amount of times that, while chatting with people about what to do next, I got suggested to look at Entrepreneur First as one of the coolest new models around.
EF is a pre-idea entrepreneurship program. They take the brightest young minds from the top universities in the UK (and abroad) and help them meet other people and launch a startup.
I’ve always seen two major risks to this approach: 1) inexperienced just-out-of-school people, which can be great for social software, but probably a bit less so for hard-tech B2B companies and 2) co-founder mismatches and problems, given you’re literally meeting your co-founder for the first time at the program.
But they seem to have solved for both risks: on top of recent graduates, they are now targeting people coming from Tier 1 companies, and they say they have developed a great program to match people.
The results have certainly been brilliant, given Twitter has bought up one of their companies for $150M, and the others are not doing to bad either.
Indie.vc
Indie.vc is the grand experiment in alternative funding model for startups by Bryce Roberts, a partner at OATV.
He’s questioning the assumption that startups need only to focus on hyper-growth and not on just creating a sustainable, profitable business. Thus, indie.vc has a model where it will get paid back by dividends from the company, specifically it will get 80% until it gets paid 2x and then 20% until it reaches a hard cap of 5x its investment.
Meanwhile, should the company decide to actually go for hyper-growth and raise additional funds, its investment will just turn to equity at a pre-negotiated conversion price.
My view here is that this is an awesome and very much needed experiment. Indie.vc thus will have a portfolio of a few companies that will raise more money where it will get equity and have a potential 5x return from the ones that don’t. Given this approach would tend to find companies that are inherently less risky, it might yield a pretty interesting return.
They’re now on their v2, raised a specific fund and make $100k-500k investments.
Best of luck to Bryce on this amazing effort.
Lighter Capital
Lighter Capital is not really a VC fund per se, but actually a VC-funded startup. They raised $17M for their operations, and invest out of a $120M LP pool.
Lighter provides revenue-based financing to SaaS businesses. That means that you get a check for say $100k, and have to pay them back a multiple of that amount, and such payments come out of your revenues — the more you grow, the more you pay.
They write checks of up to ⅓ of a company’s annualized revenues and don’t get any equity.
This is an extremely smart model, which drives probably around 30% annual returns with much lower risk than what VCs have.
Lighter Capital is able to use a lot of data and metrics to project revenues and is completely uninterested in the final outcome of the company, they are just very aligned in the short term to help it grow fast (so that they get paid back earlier, and thus generate better IRR).
A solid solution for people who don’t really want to give away equity but have a solid business and could use a boost.
Bullpen Capital
I had the pleasure of meeting Paul and Duncan from Bullpen after they invested in a company I worked at — and remember being instantly impressed with them.
They were the firsts to aggressively go after a clear opportunity in the VC market: the famous “Series A” crunch.
Bullpen figured out that with the massive explosion of seed funds (themselves pretty innovative at the time), and the shrinking of the later stage VCs post-bubble, there was now a massive opportunity to find underpriced post-seed deals.
They have been thus able to invest in companies that needed just a bit more time before raising their Series A, but whose seed-round VCs wouldn’t bridge. This means getting companies that are fairly de-risked but still very cheap.
It looks like it’s going well for them as they’re already on to their third $75M fund (the previous ones were $24M and $31M).
I also highly suggest listening to Paul’s interview with Harry Stebbings on the 20minVC.
Data Collective
If you know Matt, you already know he’s the man. Add Zack to the mix and you get one of the best new firms around.
DCVC’s innovation stems surely for its approach to backing extremely deep tech, but also from employing a “collective” approach of giving experts (LPs and not) meaningful carry in exchange for their help vetting and helping its portfolio companies.
These are solid people, and include DCVC’s equity partners include Jawbone’s VP of Data Monica Rogati, Facebook’s and now Google’s head of analytics Ken Rudin and Factual founder Gil Elbaz.
What I particularly like about DCVC is that they get all the marketing and operational advantages of having a “vertical” fund (focused on data advantages), and are able to still be extremely broad in the target markets.
They are now investing their fourth core fund, of $177M, with previous funds having been $140 Fund III, $75–100M Fund II and $6m Fund I.
They also have two $125M opportunity funds.
We are investors in 3 deals where Matt and Zack invested, and have also been honored to receive a small check from DCVC in my company’s seed round so I might be biased, but think there are few funds of this quality around.
Upside Partnership
Kent Goldman was exposed to innovation in VC early on, being a principal and then a partner at First Round Capital — one of the great early innovators of the seed model (almost 12 years ago!).
When he left and decided to start a new firm, he took a spin on the model and made every single entrepreneur he invests a carry holder.
That should ideally foster a deeper sense of community and shared goals between all of the portfolio founders.
The percentage of carry reserved to founders is probably around 20–40%. The first fund is a $35M vehicle.
Many firms have entrepreneur or exchange funds, but I think this is the first of its kind.
I don’t know Kent, but we’re co-investors in a deal that I like a lot, so I hope he does really well :D
Foundry Group Next
Brad Feld obviously needs no introductions and his leadership in the changing tides of VCs, with the new breed of “blogging VCs”, has been impressive to watch.
Recently Foundry Group raised a “Next” vehicle which enables Foundry to invest in later stages rounds of its own portfolio companies (like a traditional opportunity fund), invest in other VC firms (like a fund of funds) and invest in later stages deals coming out of these other firms and the broader network.
Very cool stuff. Brad clearly has seen the benefits of his huge efforts of helping other people and institutionalizing his efforts by raising a hybrid fund such as this one are a really cool and creative move.
Andreessen Horowitz
Rising from a brand-new firm to the top 3 in the world in half a decade is just unheard of, and yet this is exactly what A16Z did.
Aside from the brilliance and power of Marc Andreessen and Ben Horowitz, which would probably have made them Tier-1 VCs anyways, what was most impressive to see was their rethinking of the VC model.
When you visit the A16Z offices, it doesn’t feel at all like you’re in a VC firm (even if they kept the old tradition of being on Sand Hill Road..). Their goal is to model the firm after a creative agency, and employing more than 100 people it seems like they’re commit to it.
The DAO
One of the most ambitious and revolutionary projects in recent memory, the DAO raised more than $100M in Ethereum to build a decentralized venture fund.
It then famously collapsed under a hack which found some loopholes in the code, but it still made a lot of people think about the possibilities that blockchain technology introduces in the venture capital space.
Cota Capital
I wanted to include Cota, a not-so-well-known SF-based VC fund, because of their smart approach to long-term investing and structuring.
Cota is the “union” of the efforts from Ullas Naik (Streamlined Ventures) and Bobby Yazdani (Signatures Capital).
I got to know them as they invested in my company and learned that they decided to structure their vehicle as a hedge fund (as evidenced by their SEC Form D).
This enables them to have a longer term horizon, and be a great alternative for LPs who like to have more flexibility with their capital and can’t commit for a long period of time.
Draper Esprit
One of the many vehicles tied to Tim Draper, Esprit (which was formerly called DFJ Esprit) is innovative in the fact that it actually IPOed on the London stock exchange.
This allows the firm to not be bound by the traditional 10 years fund lifecycle and supposedly have a longer horizon for its investments, consequently enabling them to make bolder bets.
It’s certainly an interesting model, with a bunch of pros and cons, and I’m really curious to see how it goes for them.
137 Ventures
137 is focused on investing in late stage companies by acquiring employee’s shares or lending against them. This is super smart as they get access to some extremely proven companies, at lower-than-market valuation, and can do so at any time, with small check sizes.
They raised three funds ($137M, $137M and $200M) and even poached the great Elizabeth Weil, that I had the pleasure of meeting while at A16Z.
FundersClub
FundersClub is an online VC, as in they’re using network effects to run a centralized yet community-driven VC firm.
So, differently than AngelList, they actually have a FC portfolio. They don’t fund direct competitors, but pick one team to back per market opportunity, and then try to actively add value.
They’re also doing some interesting stuff with funds and partnerships.
Unshackled
Unshackled is a super smart arbitrage play. They market towards all the people that are stuck with US work visas or want to get to the US.
In exchange for equity, Unshackled not only provides cash but also acts as an employer and visa sponsor for founders. That’s gotta be genius.
Unshackled raised some $5 million from some 80 A-listers like Laurene Powell Jobs, Jerry Yang and Bloomberg’s venture arm. A larger financing round is said to be in the works.
Studios (Science, Expa, etc.)
The studio model has fascinated me for quite a while, and I even compiled a long list of them (which I’ve since stopped maintaining because every week there seems to be a new one).
It surely isn’t a new model (IdeaLab has been doing this forever), but more and more hybrid examples are launching and I think it’s worth to keep track of it.
If you’re able to make it work (it’s really hard), the economics can be absolutely amazing, as you end up owning a significant part of the company.
One of the newest interesting hybrids is Expa, which couples it studio activity with its venture investing and also acceleration program. Going full circle.
Vertical Funds (Seraphim Space Fund, Rock Health, etc.)
Again, not a specific fund here as much as the concept of a fund that focuses deeply on one vertical. We’ve seen with Data Collective that this can be done on a very broad horizontal theme, but oftentimes it can make solid sense to do it in a vertical market.
Obviously, the market needs to be absolutely gigantic, otherwise it becomes really hard, but given the right market the pros can fast outweigh the negatives.
In this regard, I think the performance of Rock Health (which started as an incubator) can be a very good example of the possibilities.
Scout Programs
The WSJ scoop on Sequoia’s scout program was a defining moment for me to understand the ambition and innovation of the best people in the business.
Sequoia clearly doesn’t need to differentiate in order to get fresh LP cash, as it can raise however much it wants.
But it surely still needs to make sure it’s always relevant and on top of what is happening in new areas.
The scout initiative was a really well played move, that’s been used by countless other VCs with varying degrees of success as we speak.
