Many startups go through a phase that tests the mettle of a founding team. I see it all the time as someone who runs a community for entrepreneurs. They raise a decent amount of initial funds, and see a little bit of early success or media attention. Then they fail to really take off for inumerable reasons. That doesn't mean, however, they're not worth investing in any longer. Often gems are found in this group. If only they had another round of funding that's not too small ($1 million), not too large ($5 million), but just enough - about $2 million.
One emerging venture fund focused solely on these startups is Bullpen Capital, named after the baseball term to indicate its place where startups can "warm" up before they get back out into the field fully refreshed. Bullpen officially launched Wednesday morning.
Founded by Paul Martino, founder and former CEO of Aggregate Knowledge, Duncan Davidson, founder of Covad and former venture partner at VantagePoint, and Richard Melmon, co-founder of Electronic Arts, Bullpen is positioning itself as the VC firm that will provide the second round of financing for super angel-funded deals. The partners are targeting a $50 million fund, which Paul expects to fully raise by the end of this year. The three partners have raised some initial funds to begin making investments, such as its first investment in Assistly.
As Paul sees it, of 100 investments made in the seed stage, about 30 become moonshots, 20 end up failing, and 50 end up in a stage where they're not growing like rocket ships to support a new round of $5-plus million. Many of these companies are often pivoting to a new model. It's an area that many people don't want to pay attention to, but should, according to Union Square VC Fred Wilson, who wrote about how this group, which he calls "the mess," is worth investing in.
As Bullpen puts it in its Private Placement Memorandum, "Bullpen's role is to align with the super angels, and lead the post-seed stage rounds that support the pivots of their companies."
"Chegg is an example of a Bullpen round," said Paul, in our interview. Basically, Chegg went sideways for years until it made a major pivot that put it on the right trajectory. It's at that time - when the pivots are being made - that Bullpen wants in. In many ways, it's the time when startups will often consider taking in "bridge financing" or a loan to bridge them to another funding opportunity in the future. One could say that Bullpen is doing bridge financing with an equity round. Bullpen is targeting investments of about $2 million for a pre-money valuation of $10 million.
Even those these rounds appear to be fraught with risk, as Paul sees it, these follow-on financings aren't as risky as the first-money-in rounds, which is the place where the most risk resides. Additionally, Bullpen believes that by looking at only deals funded by super angels, its risk is reduced even more because these startups would have already gone through some vetting by some pretty sharp people. Bullpen would put Javelin Ventures, First Round, True Ventures, Floodgate, SV Angel, SoftTech VC and Felicis in this broad bucket of "super angels" - firms that want to be first-money in. Investments at this stage are typically $1 million raised at a $4 million pre-money valuation.
Watch my interview with Paul to hear more about his new fund, his investment philosophy and what kind of investments Bullpen is looking to participate in.