VC Patrick Gallagher on Where CrunchFund is Shopping Now

192000v2-max-450x450By Semil Shah

When college friends Patrick Gallagher and Michael Arrington came together in 2011 to start CrunchFund, Arrington — who’d founded the media property TechCrunch in 2005 — brought contacts, startup smarts, and a talent for drumming up attention to the table. Gallagher brought his own sizable network and institutional investing know-how, having been a partner with VantagePoint Ventures and, before that, an investor at Morgan Stanley Venture Partners.

The mix appears to work. The pair have funded hundreds of companies to date, including Uber and Airbnb. They’re also investing a second fund that closed earlier this year, having reportedly closed on about $30 million, or roughly the amount of their debut fund.

This week, I asked Gallagher about that second fund via email. We also talked about Arrington, who made Seattle his primary residence back in 2010, a year before he sold TechCrunch to AOL. Our conversation follows:

When most people think of “CrunchFund,” they think of Mike Arrington. How often is Mike in the Valley these days, and how have you observed him change as he transitioned from a writer and blogger to a full-time investor?

These days, Mike spends at least half his time in the Valley, where around 70 percent of our investments are.

When we started CrunchFund, one of the things that really resonated with Mike was the ability to meet with and interact with entrepreneurs at the earliest stages of a company’s life. Those were the types of companies he initially wrote about when he started TechCrunch and what he enjoys the most. Mike has always had a good sense for consumer start-ups but when you’re writing about a company, the opportunity cost is primarily your time to write the article. When you make an investment, the opportunity cost is much higher in terms of dollars and time. The biggest change I’ve seen in Mike since he became a full-time investor is his investment evaluation process. He now spends significantly more time trying out products and getting to know the company founders before he’s ready to sponsor an investment.

CrunchFund’s smaller bet in Uber’s [$37 million, December 2011] Series B round is now of epic status. Walk us through how that deal came together. Was the partnership divided about making such an investment as a seed firm?

CrunchFund is primarily a seed and early stage fund, but we allocate up to 20 percent of our fund for later-stage investments in companies we think can still generate venture level returns, and these have included Uber, Airbnb, Square, Skybox Imaging, Bluefly, Redfin, and a few others.

Mike had written about Uber when it had first launched and had been friends with the company’s CEO, Travis [Kalanick], since 2006. We were both loyal users of the service, and when we found out that the company was raising its Series B, we asked if we could invest a small amount, and they graciously gave us an allocation.

Tell readers more about what you focus on as an investor, including the B2B side and infrastructure side. I think founders want to know more about CrunchFund’s appetite for startups.

I started my career in the venture business in 1997 at Morgan Stanley Venture Partners. We were the venture arm of this massive financial services firm that spent over $1 billion on IT, so I’ve spent most of my career investing in enterprise-facing companies and I spend the majority of my time focused on them at CrunchFund. About 40 percent of our investments are enterprise-facing companies, including Digital Ocean, Mesosphere, Branding Brand, Abacus Labs, Feed.fm, Rocketrip, Layer and many others. I see a ton of innovation in the enterprise, from the infrastructure inside the datacenter to the software people are using to manage their businesses day to day.

I’m also a big believer in companies that sell to [small and mid-size businesses]. I was on the board of Constant Contact through its IPO and have seen firsthand that you can build a large business selling to this segment.

For enterprise infrastructure deals, which don’t feature as many “party” rounds as do consumer deals, how does a smaller fund like CrunchFund make a dent when all the big firms want to max their ownership?

CrunchFund typically invests $100,000 to $250,000 as an initial investment, and we normally don’t lead deals, so it’s pretty easy for us to fit into most rounds. We’re additive to any investor syndicate, and we focus on providing specific help with media and PR positioning and
and introductions for larger follow-on rounds of financing through our network. We also open up our networks for things like business development, recruiting, and customer introductions. For us, because our fund size is still relatively small, investments in this range are meaningful.

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