Hi, happy Monday, everyone! We’re still traveling with our family; to help out with the newsletter, investor and friend Semil Shah has a new “how I raised it” type interview for readers — this time with Homebrew, the seed-stage, San Francisco-based firm. Hope you enjoy it. More tomorrow.:)
Top News in the A.M.
Uber‘s board is in preliminary talks with three investor groups wanting to buy shares in the company. Dragoneer’s investment coalition wants to buy out shareholders at a discount to Uber’s current valuation. So does Softbank. Both groups would also purchase a small number of new shares at Uber’s $68.5 billion valuation to prop up that figure. A third group, led by early investor Shervin Pishevar, has apparently talked with an existing investor about buying its shares at the current valuation. The New York Times has the story here.
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How We Raised It: Homebrew’s Founders on Raising Fund One
By Semil Shah
Satya Patel and Hunter Walk founded Homebrew in 2013 after respective tenures leading product at Twitter and consumer product management at YouTube. Homebrew’s broad focus is on startups supporting the so-called bottoms-up economy, which helps businesses, customers, and individuals drive growth and innovation through simpler, cheaper, and more direct access to technology, information, and customers.
We talked with both partners recently for their advice on how to get a debut fund off the ground.
You’ve both been operators at big-name companies. Satya, you’d also been a VC before, including at Battery Ventures, where you’d spent four years. How long did it take to raise Homebrew’s first fund? How many LP meetings did it take?
We raised Homebrew’s first fund in early 2013 and it took about 100 days from our first LP outreach to the single close of a $35 million fund, including a month of paperwork.
We started with a list of 40 LPs who fit the following criteria: institutional LPs who had already invested in early stage, sub-$100 million funds and specifically, our friends’ funds, so every introduction was a warm handoff to an LP who had a prepared mind for what Homebrew was going to pitch them. From the initial outreach list of 40 LPs, 20 converted into first meetings.
You closed that fund with $35 million. How much were you targeting?
We’ve always taken the perspective of funding a strategy – i.e., raise all we need but not more. Fund 1 is a $35 million fund [because that] was what we thought it would take to lead and co-lead seed rounds. It turned out to be a bit undersized given the increase in round sizes during 2013-2014 in particular. We right-sized in our second fund [raising a $50 million seed-stage fund and a $35 million fund for follow-on deals].
Did that second round of funds came together fairly easy?
We raised it in January 2015 and started investing out of it late spring 2015. The process of raising it was just a few weeks because LPs were investing “lines rather than dots.” We were still proving out Homebrew’s ability to be a great firm, but we had some data points that suggested we weren’t terrible or, as LPs say, “We were doing what we said we’d do.”
One thing we messed up – at the very least in our communications, if not our decision-making – was that we largely eliminated the “friend and family” allocations because we needed to try and fit in new institutional LPs. We didn’t do a very good job of explaining why some of the people who bet on us early couldn’t continue investing with Homebrew. If we could do it over, we at least would have put more thought and care into these conversations.
Can you offer a few more pieces of advice to aspiring fund managers out there in today’s market?
We get a lot of calls from people looking to raise first funds, and also lots of diligence requests from LPs looking at these funds. Three pieces of advice we always give are:
Have a compelling reason why you exist — why top founders want to take your money versus all the other sources available. Seed is perceived as lower barrier to entry because fund sizes can be smaller, which helps first-time managers, but it’s a stage where dealflow is dark and picking is hard.
Understand portfolio construction, reserve allocation, ownership dilution and so on. There are many folks coming from the operating side who don’t think about the investment manager aspect of this businesses. You need to understand how your fund size, check size, point of entry, target ownership percentage and so on, all work together in a consistent manner. Trying to make these decisions separately is like telling six different engineers to go into different rooms, each build a random different feature and then stick it together to make a product. It doesn’t work that way.
Be deliberate in your raise timeline and treat it like a sales pipeline where you’re trying to hit your quota for the quarter. We all coach our startups about fundraising and then sometimes don’t take our own advice. You need to create momentum, spend real time getting to know LPs during that period, but push people to make decisions. You’re not going to raise a fund in a week, but a year of fundraising with rolling closes is a distraction and perhaps a signal that you’re doing something suboptimally.
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