IA Capital Group focuses on fintech and insurtech startupsRead more...
CrossCut just raised a $75 million fund, will invest $2.5M to $3M in 25 to 30 companies
There has been a big debate over the last few years over whether the Series A crunch is real or not.
What everyone can agree on, though, is that there are definitely more seed and early stage funds now than ever before, and more people willing to give more and more money to young companies looking to make it big.
But just who are these funds and venture capitalists that run them? What kind of investments do they like making, and how do they see themselves in the VC landscape?
We've highlighting members of the community to find out.
Prior to co-founding Crosscut, Garrett was a Partner at Palomar, whee he played an active role in managing and investing three funds over six years totaling more than $500 million.
Prior to Palomar, Brian was the Director of Business Development at Niku Corporation.
Brian received his MBA from Stanford's Graduate School of Business and he graduated from Stanford University with a B.S. in Industrial Engineering.
VN: What do you like to invest in? What are your categories of interest?
Brian Garrett: We're trying to be the company building capital of L.A, We are looking to be first institutional money in the best and brightest ideas that this ecosystem is producing. I would describe the core DNA of the L.A. tech scene as being focused on the following: eCommerce, AdTech, Mobile, SaaS, Content, Marketplaces and Gaming.
We now have four full time Managing Directors, and three of us are ex-entrepreneurs, with me, Clinton Foy, Rick Smith and Brett Brewer.
Bret was in AdTech, Clinton was in gaming and I was in e-commerce. I have shied away from e-commerce. I do deals there, but not nearly the pace we used to, because the space is out of vogue. I've mostly been doing SaaS for small to medium businesses and marketplaces.
With SaaS, we continue to see very scalable sales channels for lightweight software solutions that are needed by particular verticals. These are companies selling 10,000 plus per year in licenses to a piece of software, and they need to do it more effectively.
Narvar, for example, was a supply chain management platform, that was focused on post transaction experience for e-commerce. They were providing software for customers after the transaction was made.
In marketplaces, we look at tech enabled services, on the supply side, that are automating it through routing software. Those seem to be popping in our pipeline right now.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
BG: If you go back to start of our fund, probably two companies that pop out.
The first was Shoedazzle, which was an innovator in online subscription commerce. That company grew rapidly and, as one of the first investors, we chose to take a secondary liquidity opportunity in 2011. We weren't convinced that it was was going to be $1 billion company. It has since been bought by JustFab. As Shoedazzle exited, we also invested in JustFab and now Adam Goldenberg is an investment partner.
That deal put us on the map. The ability to see an emerging business model around subscription commerce, particularly in shoes, the timing was just right.
The other was GumGum, which just raised $26 million in a round led by Morgan Stanley. That was the first deal that CrossCut did and we spent the first year to 18 months working arm in arm with the entrepreneur to build out the larger image ad network.
VN: What do you look for in company's that you put money in? What are the most important qualities?
BG: In both of those cases, it was the quality of the entrepreneur. GumGum didn't know what they were going to be. They pivoted. They started out by being focused on image licensing, and wound up defining image ad monetization. With both deals, we feel very lucky that we backed great founders.
We go looking for some sort of differentiated or scalable business model. From CrossCut's perspective, there's a lot of great tech out there that does not make great businesses. We pride ourselves on finding businesses that can scale with as little friction as possible.
We are not ones to invest in eyeballs, or monetization risk down the road and that is both good and bad. We might miss out on major platform plays, but those still have a lot of business model risk.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
BG: My first job out of Stanford was at a tech strategy consulting firm. That was in 1995, at the start of the first bubble and I was thrown in to set of project, writing business plans for high flying bubble companies in enterprise software, new solutions, and automation of manual processes. I cut my teeth experiencing business models and management styles. While I loves dabbling, I didn't love seeing value all going back to business, with no upside or equity, but then the firm started taking equity I saw value and upside. My boss made $300 million when they went public and I had fallen in love with the tech industry and the entrepreneurial mindset. I went to get my MBA because I wanted to be in venture.
When it came to venture vs entrepreneurship, I have done both and I found the energy from having a portfolio, and companies that I had a sense of responsibility to, in helping them achieve their goal, to be more rewarding. It was a better fit for my skill-set. I love what I do. With CrossCut's porfolio, I want to see what I can do to help these young businesses. Entrepreneurs have passion ad they have fun with what they do every day.
VN: What is the size of your current fund? How much capital do you know have under management?
BG: It is a $75 million fund, and we now have $100 million under management.
VN: What is the investment range? How much do you put into each startup?
BG: Our first check is about $1 million on average, but obviously that can vary.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
BG: A typical investor syndicate takes around 20 percent to 30 percent of a company. Our goal is to get north of 10 percent with our dollars. That means half leading, with one or two co-investors, but trying to take a lead role, setting terms and getting board seats.
VN: Where is the firm currently in the investing cycle of its current fund?
BG: We just announced the new fund earlier this week.
VN: What percentage of your fund is set aside for follow-on capital? What is the size of the fund?
BG: We plan to reserve $1.5 million to $2 million per deal, so 100 to 150%. We wil invest between $2.5 million to $3 million in total.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
BG: Most of our investments are from our seed fund. For us, a typical round is a single digit per money value.
VN: In a typical year how many startups do you invest in?
BG: Out of first fund, 10 out of 18 investments became successful scalable profitable businesses. With this fund we plans to build a portfolio of between 25 to 30 companies.
VN: Is there anything else you think I should know about you or the firm?
BG: Our orientation is four full time Managing Directors. Rick and have worked together, investing for 15 years. That is our unique differentiation. We are largest seed fund in LA, which will position us the as company building capital of LA.
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