You can get away with a lot when your investors are wealthy individuals. Such is the case with Collaborative Fund, a three-year-old, New York-based venture fund focused on collaborative-consumption models and backed by some big wheels, including former Sequoia Capital general partner Tom McMurray, private equity veteran Doug Smith, and Jay Kim, a venture partner and investor in Collaborative who co-founded the video game developer Nexon Corp in 1994. (The bootstrapped company went public in 2011 on the Tokyo Stock Exchange and is now valued in the billions of dollars.)
Indeed, the same group of investors to back Collaborative are today rolling out a new, special purpose entity called Alignment Holdings that counts Collaborative founder Craig Shapiro as one general partner and Smith — who will be leading the outfit’s day-to-day affairs — the other. The idea, says Shapiro, is to work with companies that are producing real revenue, without forcing them to adhere to the constraints of a typical fund. “The life of most funds is 10 years, and you have a three- or four-year investment period after which you’re expected to harvest investments.” With Alignment, “We can invest in a business and hold it for 20 years or more.”
I talked with Shapiro yesterday about how Alignment works, who would use it, and why he’s suddenly involved with two very disparate funds.
What was the impetus for Alignment?
It kind of came together because we were seeing mission-driven founders not being excited about their current liquidity options. Some feel like selling their business would detract from their mission and that going public is arduous and expensive and makes them beholden to a quarterly result. This is targeting companies whose early-stage investors may be looking to exit. It’s almost like a leveraged buyout, where we say, “At this price, we’re going to purchase your preferred shares.”
Don’t secondary sales address this issue?
You’re seeing some people solve for that problem through secondary markets, but it can also be really distracting, deciding who gets to sell their shares and for how much. It’s why we chose to create vehicle that’s evergreen. While the purchase side is the same — we won’t be doing anything different than, say, a private equity firm that buys shares on the secondary market — the difference is that the private equity firm will expect [to receive several times their investment] within a few years. With us, companies have a significantly longer time period to [produce a return] through smaller chunks based on revenue. It’s more like a mortgage on your house.
Have you raised the capital yet? If not, how much are you targeting?
We’ve raised money; Jay [Kim] is our anchor investor, but it’s still open, so our attorneys have advised us to be cautious about what we share.
Does this kind of structure rule out syndicates?
We could partner with an entity that has a similar return profile, but yes, it wouldn’t work if we were working with a private equity or venture shop that’s hoping a company is going go public. If I’m a VC, I’m saying, “Reinvest everything so we can get to the IPO.” Alignment is targeting companies that don’t want to rush, that would rather buy [their shares] back from employees and shareholders and refinance the company.
What size checks will you be writing, what kind of return do you expect, and how long will these terms be?
The size of checks will vary pretty greatly, and we can structure [these arrangements] in different ways. If a company is throwing off a lot of cash, it can carry a larger debt component at a lower rate. If it isn’t throwing off a lot of cash, you can extend the life [of the loan] but have additional equity, so if the company has a liquidity event, Alignment gets some upside.
Do you expect that some of Collaborative’s portfolio companies [which include Kickstarter, Lyft, TaskRabbit, and Hampton Creek Foods] will eventually be candidates for Alignment? If so, would that be a conflict?
We’ve formed an external investment committee to deal with any conflicts. The truth, though, is that because Collaborative Fund is investing so early, it will likely be years before any of our companies would be ready for Alignment Holdings. But I think it would be a great thing.
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