Early in January 2016, I was thrilled to announce Stephanie Palmeri and Andy McLoughlin becoming Partners! At that time, we filed SEC Form Ds disclosing the creation of two new funds — SoftTech VC V and SoftTech Plus. We’re delighted to announce that both funds have closed at their hard cap, respectively $100M and $50M — great news as we celebrate our 12-year anniversary. Most importantly, we are beyond excited by the myriad of new, radical innovations we see coming from early stage entrepreneurs and the opportunity we have to help them realize their vision with our active support and capital.
To share a bit of background: we invest our funds on a 3-year investment cycle and will be wrapping up Fund IV (that held a final close a couple of years ago) as planned sometime in Q316. Why raise a fund when we had plenty of dry powder in Fund IV? When we discussed our fund raising plans with Limited Partners (LPs) last year, we were warned that a large number of managers were planning to go to market in the first half of 2016. Their advice: it should be easy for us to raise but we should go out early in order to do it quickly. That’s essentially what we did.
SoftTech VC V
Our $100M Fund V is the slightly larger version of Fund IV ($85M). We will invest in about forty seed stage startups over the next three years, with initial check size ranging from $500K to $1.5M. We will also reserve capital for Series A and B pro-rata investments — with an objective to recycle all management fees and up to 20% of the Fund. We “hard capped” Fund V at $100M as we believe that it is very challenging to have a seed focused strategy, strive for bringing the best possible co-investors and limit founder dilution with funds that are much larger. While we could have raised up to $200M for this vehicle, we elected to be disciplined.
Like Fund IV, Fund V will look at acquiring 7 to 10% of the companies it invests in by writing checks ranging from $500K to $1.5M. We expect to continue leading and taking board seats in 30% of the deals we close — serving on these boards for about two to three years. The rest of the time, we will co-lead or join a syndicate led by one of our peers. Companies we invest in at seed stage will typically be raising $2M to $3M, after developing a product that has received some initial validation from early users or customers. They may have raised a friends and family round, a pre-seed round, or have gone through an incubator.
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Core investment sectors, technology and wedges for SoftTech VC’s $100 Fund V[/caption]
Our portfolio construction has evolved over the past twelve years and four funds: way back, I started by investing heavily in “traction-based” consumer internet, gaming and adtech — three categories we have move away from in recent years. Just as new categories of startups have emerged, we’ve evolved our focus areas to take advantage of opportunities ripe for investment. We have updated our sector chart to reflect the areas of interest of Fund V:
- SaaS/B2B will again be our core focus, looking for opportunities in cloud infrastructure, vertical SaaS, developer tools and the mobile application stack.
- Connected Devices, both consumer and industrial, now have their own sector after years of “New Areas” classification.
- Consumer Services and Media will typically have a clearly defined business model (subscription, ad-based, freemium,…), even if it may not be in place when we invest.
- Commerce and Marketplaces will primarily consist of investments in B2C and B2B marketplaces and e-commerce infrastructure.
- New Areas is our “catch all” sector dedicated to new categories, technologies or types of investments before they become eligible for their own sector. That’s where Connected Devices like Fitbit, August, and Molekule started. In Fund V, “New Areas” deals may include AR/VR, AI, autonomous vehicles, and robotics opportunities.
In addition to sectors, we also have the concept of Wedges — industries in which we invest across quadrants. In the past we have been very active in Education Tech and Healthcare IT. In Fund V, we’ll continue with both, as well as Government and “Blue Collar” tech (which covers non-knowledge workers in construction, transportation, hospitality, etc.).
It’s fair to say that we invest in a very broad set of categories — but we are extremely concentrated geographically. Roughly 80% of our investments are in the Bay Area, 10 to 15% are on the East Coast between New York and Boston, and the rest are in Canada (between Toronto and Waterloo). We’re open to coming back to Los Angeles or Boulder, where we’ve had successful investments in the past — but that’s pretty much it. And while we don’t invest outside of North America, we are more than happy to invest in strong international teams that have relocated to the US.
SoftTech VC Plus
A number of our colleagues have raised Opportunity funds in the last few years. While implementations can vary widely, these are typically late stage vehicles that allow firms to double down on their best companies when the fund that originally invested is out of capacity for follow-on investments.
This is the purpose of the Plus Fund: it will invest $2M to $5M (or more) in Series C or Series D rounds of existing portfolio companies, going as far back as Fund II. Only a subset of deals will a fit for the Plus fund, based on a set of criteria we’ll refine over time (revenues, growth rate, valuation, potential exit multiple, etc.). We expect to invest in 12 to 15 companies over the next three years.
So far, Plus has made one investment: the $35M Series C round of Vidyard led by Battery Ventures, in which we contributed $3M.
A Swift Fundraising
We were fortunate to assemble a strong syndicate of institutional Limited Partners when we raised Fund IV and proudly saw all of them come back in this raise. Per the advice of our LP Advisory Committee (LPAC), we released our data room to existing and prospective LPs on Dec 23rd (our way of wishing them “Happy Holidays!”). We followed with six weeks of fundraising meetings and initiated the closing process — our first close happened at the end of March for $95M in Fund V and $32M in Plus, and the final close took place last week with a handful of new LPs who needed some extra time for their investment process.
Our anchors among existing LPs were Michael Kim from Cendana Capital and Trey Hart from Northern Trust, who are again joining our LPAC. They are joined by Lindel Eakman from FG Next and Greg Millhauser from Glenmede, both new LPs in Fund V and Plus. Other large investors include Knollwood Investment Advisory and the State of Wisconsin Investment Board. In total, we welcomed 40 investors in this raise: 18 institutional, 16 individuals and 6 family offices. And we’d like to take this opportunity to thank them for their support and their trust.
None of this would be possible without the hard work of the 176 founding teams we have invested in to date — and we want to thank them too.
One More Thing
We’re excited to announce that Nicole Carpenter is joining us as Executive Assistant for all three Partners, after three years assisting the CEO and executive team of Super Bowl 50. A warm welcome to her as the latest member of the SoftTech family.
Ashley Cravens has been promoted to Director of Operations and will focus on managing the firm’s back office, events, HR, and finance operations. I want to thank her for her tremendous support over the last 6 years as my Executive Assistant and congratulate her on this new role!
SoftTech VC has come a long way, from me on my own in a tiny attic office in Palo Alto investing from modest savings to my team of investment partners and operations support in our thriving San Francisco office, with $300M+ in assets under management. In addition to our 176 deals, we’ve launched a robust series of monthly and annual events (including our Founder Summit, CTO Summit, and expert roundtables) to better connect the amazing network of SoftTech founders and executives.
Our entire team is beyond excited to start a new chapter for the firm with these two new funds and to find additional ways to support our founders. We’re humbled to have the opportunity to back more awesome entrepreneurs whose crazy ideas just might work and to help them build iconic companies that will have a meaningful, positive impact. Finally, I am thankful for the opportunity to serve a 4-year term on the NVCA board, supporting Bobby Franklin and his team in their invaluable service to our industry.