Venture Funds as Products. What We Changed for Homebrew III.

“What did you change about Homebrew III to better fit ‘seed phases’ versus seed rounds?” a fellow VC asked me after my previous post. That’s a great question! One consistent LP complaint I hear about new’ish fund managers is that they forget a bunch of fund construction and portfolio modeling decisions are connected. The amount you raise, the average check size, your follow-on strategy, the fund staffing and so on — these aren’t single points but instead need to all be driven from one’s mission and strategy. For Homebrew, we’ve optimized for a product offering that will appeal to our target customers (founders) and maximize spending our time being hands-on supporting startups. So if you look at each of our funds as a version of a product release, what’s new or different about Version, errr Fund, 3.0?

Actually not much. We’re still working with a very small group of institutional LPs, making a target of 6–8 investments each year during the seed phase, and keeping the partnership tight. But there was one non-traditional request we had and which our LPs agreed to support. We lengthened the initial investment period as well as the fund itself. In simpler language, Satya and I anticipate making more total investments in this fund (~32) than we did in the previous two (20 and likely ~25 respective), while not fundraising again until ~2022 (versus a more typical cycle of raising every three years or so that many < $200m funds employ). To execute this strategy we decided that ~$90m was the right size for Fund III. Here’s our thinking behind these figures:

• Seed phases require patience and we don’t want companies to try and raise their Series A before they’re ready

When a VC is fundraising one of the stats they like to present to LPs is the quality and size of follow-on in the portfolio. For a seed investor like us that would mean “How many companies have raised a Series A (or later) and how good [brand name] are the investors leading those rounds?” This can sometimes consciously or unconsciously cause a VC to feel pressure to get their investments into their next round and marked-up in order to show momentum. In the first two Homebrew funds we’ve not always seen a correlation between speed of subsequent fundraising and long-term durability of company. Especially with founders who…