Expanding on the Adventure Fund

How we’re going to bring more good business into the world

***********************UPDATE *************************

So before you read any further, I need to offer a long overdue update about this post. At the end of 2018, we set off to raise the first fund in the UK to invest with the same approach as the likes of Indie VC or Earnest Capital.

As with any fundraising effort, it was super difficult. We struggled with a lack of track record as investors but also in the entire approach. And the usual UK tax benefits (EIS) for startup investing don’t work under this kind of approach, and that stopped many an angel investor in their tracks.

We also realised that ustwo is not set up to be a fund manager. There are many great parts that fit under the ustwo umbrella, and our founders remain in full control. That independence is so very valuable, and precisely why we think these funding models are exciting for other founders. Taking the plunge to bring on LPs was a move we ultimately decided was not worth making for ustwo. And so the ustwo board asked me to do more with less (i.e., a smaller budget). It’s a perfect outcome, really, as that is exactly what we want founders doing. Less external funding. More great work, instead.

As ustwo Adventure heads into 2020, we will continue to champion these alternative models. We are actively building relationships with others in this space and joining rounds led by like minded investors when there is a good fit with our areas of expertise and excitement.

We still believe in everything that comes next in this post. And we’re still very up for meeting founders and investors alike in the UK who are hoping to make these options mainstream along with us.

*************************UPDATE ************************

Back in May, I wrote a little piece about how ustwo Adventure is knowingly and willingly looking for our place in the world. I put forward the very scientific, guiding equation of:

Strong Values + Decent Human Beings = Can’t Lose.

This week, Mills wrote a little piece about how we’re changing up our investment strategy.

Landing in this place is not a coincidence but a culmination.

Why this?

It’s in our bones to keep reinventing. ustwo did mobile design pre-iPhone and rode that wave to become the largest independent digital studio. We created Monument Valley and changed the standard for premium mobile games. We are currently establishing the ustwo Foundation to help young people into creative careers.

We are always moving forward. Wherever we move, we come with a thoughtful opinion on how we can make the world better.

We’ve spent the last five years learning in the venture space. Here’s our 20+ investments so far:

We’ve come to see that venture capital works for a select few and — when applied incorrectly — runs the risk of pushing completely viable businesses to the brink. From there it’s boom (occasionally) or bust (fairly often). We believe we can create an alternative.

And why now?

The world needed to go through a full cycle (or two?) of modern venture capital to allow us to step back and assess. We see three big things:

• This is the age of the entrepreneur, and major improvements in the infrastructure (servers, payments, remote working) have brought a wave of talent into startups
• Businesses don’t require venture scale to create tremendous value (for founders, employees and investors alike)
• Our favourite founders are the ones who think long-term and are savvy operators who keep things simple (for example: revenue > costs = 👍)

When we put our ustwo-coloured glasses on, we also deeply believe that design (externally) and culture (internally) are competitive advantages not worth sacrificing for growth’s sake.

There is an urgency and sense of community around this thanks to Bryce Roberts of Indie.vc, Tyler Tringas of Earnest Capital, Purpose Ventures, NEXT, the Zebras Unite community, Lighter Capital and many others.

We want to be the first to do this properly in the UK. Time to get moving.

Who is this for?

We’re still learning, so this is subject to change and will one day be laid out properly on our website. In general, we are looking for businesses that are:

1. Profit-focused. If you’re already dreaming of your Series B, then you should probably go down the venture path. We are looking for a long-term, sustainable profit mindset. This one is non-negotiable.
2. Tech-led. You need good margins and ability to scale to make this model work. Tech-led (not just tech-enabled) is an important starting place for the right combination of those things.
3. Design-minded. Now this is where we may start to diverge from other investors. Design thinking is our bread and butter at ustwo. We exist because we believe it’s a critical differentiator for companies of any size. We want to see this in the companies we back.
4. Culture-oriented. We aren’t here to tell you what kind of culture to have. We just want to make sure you and your business are operating with a set of core values and are true to yourself. Because when things are tough, your culture and values will be what guides you.

Additionally, in all likelihood, this makes sense if you are already generating revenue and have a defensible path to profitability in sight.

How does it (actually) work?

Mills mentioned some of the catchy headlines: no equity upfront, no board seat, capped returns paid through cash distributions. That’s all true. We are still working through a draft term sheet with our legal advisor and will share it openly when we’re ready.

To see some fleshed out versions, Indie and Earnest have made their terms openly available. Adam Huttler from Exponential Creativity Ventures has published a draft S.H.A.R.E. as an alternative approach to the S.A.F.E.

In these examples, the common parameters are:

• £100–500k. This capital is about unlocking pent-up growth, not subsidising it until the next round. This amount should credibly get you to profitability so this can be your last round (if that’s what you want).
• No upfront equity. This is about preserving founders’ most valuable asset. We can find other ways of realising value, namely…
• Revenue or profit share. These payments would kick in 2–3 years post investment, once the business has grown and can afford to take some cash out to repay investors.
• A capped return. This is in the range of 3–4x typically, not insignificant but certainly more modest than the 10X+ traditional venture wants from all of its investments.
• Equity option. This is also in the single digit % range, and may or may not have things like a valuation cap attached. It’s in there because things change. One day VC may make sense. One day you may want to sell your business. The option gives flexibility to do what makes sense in the future.

Benefits

Taken together, these terms allow founders and investors to remained aligned across a range of outcomes (grow, raise, sell), while avoiding forced liquidity events and growth at all costs.

We also believe this model is still about returns to investors. Getting 2–3X is a very solid return. The focus on profits and incentive alignment helps de-risk this significantly.

Can’t Lose

Join us in making this work for everyone involved. From investors, to founders to others interested in this space, I’d love to get your perspectives and challenges on what we’re doing.

Let’s discuss: justinm@ustwo.com.