The Day Our Fund III Died — and How It Came Back to Life

A year into U.S. Covid-19 lockdowns, reflecting on raising fund III under the most unusual circumstances

“Everyone has a plan until they get punched in the mouth.” — Mike Tyson

Two weeks ago we announced the successful, oversubscribed raise of two new funds at Primary — our $150MM third core seed fund and a $50MM second Select fund, focused on breakout winners from our portfolio. This outcome, which wrapped up in the fall, exceeded our expectations, brought a collection of fantastic new LPs into our family, and sets us up brilliantly for the future. But in case you hadn’t noticed, 2020 didn’t quite go the way most of us expected it to, and so the process of getting here was nothing like we expected.

Laying the groundwork

My partner Ben and I formally kicked off the process for Fund III back in early February 2020. But that was hardly the real beginning. Like anyone who is building a firm, we know the mantra “Always Be Fundraising.” We had been laying groundwork for this since closing our $100MM Fund II in early 2018. As a result, we had a robust pipeline of institutions that we had gotten to know and who seemed to have some interest. This is a key part of any GP’s job, as it is for CEOs: constantly spending a small percentage of time developing and qualifying relationships, getting feedback and staying in touch with the market, and ensuring that when you’re ready to go, you’ve got a list of warm, qualified prospects to start with.

Of particular note when we started, we got a quick verbal commitment from a large sovereign wealth fund that we had been getting to know for over five years. This is the kind of long-term relationship building that is common in VC fundraising. Relationships are very sticky once you have them, but can take years of nurturing. We really liked these guys — they were incredibly experienced and thoughtful about our business, and getting a process started with them in our back pocket was a major coup.

What were we focused on in the remainder of the raise? We knew we wanted to grow — both to accommodate new investing partners (welcome Jason Shuman) and to stay in line with a seed market that was requiring ever-larger checks to lead rounds. We targeted $125MM, and thought we might stretch beyond there if we saw demand. As we thought about that growth, we were focused on LPs that met most if not all of the following:

• Larger checks: Managing an investor base takes real work. If we were going to add $30–50MM in new commitments, we knew we’d rather do that with 5 x $10MM commitments than 25 x $2MM.
• Experience with venture capital: Early-stage venture is a long-cycle asset class that requires real patience as it goes through phases of uncertainty. We wanted LPs who deeply understood the cycles of venture and, ideally, could be helpful advisors to us as we sought broader marketplace insights, wrestled with competitive dynamics in the market, and thought about developing our team.
• Mission aligned: With momentum and success from our first two funds, we felt as though we would have the luxury of choice on our new LPs and, inasmuch as that proved true, we wanted to focus on institutions who were serving society with their mission. Foundations, health systems, and university endowments were where we focused.

A strong start

In early February, as we got the process rolling, we had a fantastic collection of prospects who were interested in us and who we would be proud to work for: prestigious universities, globally notable health systems, and some foundations with truly compelling missions. Our data room was done and tight, and prospects were giving us great feedback on our story, our team, and the quality and organization of our data. I said to Ben around March 1, “We’ll have this wrapped up by mid-May, and we’re going to have to make some hard choices on who we take.”

Yeah, right….

On the morning of March 9, 2020, I sat in a conference room in Boston with the Chief Investment Officer and senior investment team from the endowment of a major hospital system. They were deep in their diligence process and this meeting was intended as something of a closing argument for us. All I had to do was not F it up. Or so I thought.

As I walked from my hotel to the meeting, the stock market opened. But I wasn’t really paying attention — I was focused on the task at hand. The meeting started a few minutes before 10 AM and, within minutes, I could tell something was wrong. There were six people in the room, and everyone was stealing furtive glances at their phones. And then, people started to excuse themselves. The bottom was falling out of the market.

The S&P plunged 7% almost immediately that morning, the NYSE halted trading, and the markets continued a slide that would end two weeks later with major indices off 30% from their peaks. More broadly, the economy effectively shut down that Friday, the 13th, as stay-at-home orders became the norm across the country. As we can all recall so vividly, things looked terrible. Because they were.

Our fundraise was over. Nobody was going to make new commitments in this environment. Nobody even knew what this environment was. Hospitals were reeling from overwhelmed ICUs and the cessation of their major profit generating elective surgeries. Universities were closing doors and trying to reimagine their entire educational and business models. Foundations were battening the hatches in hopes of having the resources to continue doing their good work. It was ugly. And of course, the realities in the real world were worse: death, mass unemployment, general economic terror.

In the course of a few days, we had gone from a confidence that we would have genuine choice from a collection of world-class LPs to questions of whether our existing LPs would even be able to come back. I assumed it would be well into 2021 before we could hope to close a new fund.

The bounce back

But then, as we all know, the markets and, to a lesser extent, the economy came back. By June, while the real world of the pandemic and massive domestic unemployment continued to look grim, things in the tech community and the markets felt a lot less dire. By August all of the market’s losses had been recouped. The tech-heavy NASDAQ got back in the first week of June. And so in late summer we dusted off the pitch deck and data room and got back at it.

It was still a heavy lift, though. Our pipeline that was thoughtfully and deliberately so weighted to health systems and universities was still out of the market. To put it in context, one brand-name hospital investment committee member shared with me that in 2019, the hospital’s operating business had sent the endowment $50MM per month in free cash flow. In March 2020, that flow had reversed and tripled in magnitude — the endowment had to fill a $150MM operating shortfall. April’s hole was larger. They had no visibility as to when the bleeding would stop. Hospitals were off the table as LPs for the time being.

Universities were similar — they didn’t know what their fall opening plans would be, but they knew they would be very expensive, with boatloads of CapPex put into modifying facilities and upgrading technology to enable safe, socially-distanced patterns for campus life. Endowments were being tapped to support this very rainy day. New VC commitments? No thanks.

As we picked things backed up we were buoyed by the fact that our largest existing LPs were strong and committed. And our new sovereign wealth fund LP hadn’t flinched throughout, to their great credit. We had gotten new inbound interest from a handful of institutions and our existing LPs — god bless them, with special shoutouts to the folks at Greenspring and Vintage, who had worked their networks and friends to bring us new leads.

Beyond expectations

Amazingly, it all worked out better than our original intent. By November we had closed an oversubscribed fund with a range of great new institutional LPs. While the hospitals never came back, and we lost some of our existing LPs who were uniquely challenged — turns out you don’t want to be a large midtown Manhattan commercial real estate owner right now — we did land three university endowments, a fantastic new foundation, a huge global insurance company, and that major sovereign fund. Each one of them large check-writers, deeply experienced investors, and partners for the long haul.

Looking back today it’s tempting to say “yeah, no big deal. We got it done.” But remembering back 365 days from today….wow. It feels like a miracle to be here.